DayTrading, SwingTrading, PositionTrading, Extreme Investing, Short-Term Investing and Long-Term Investing. Which are you doing? And which is allowed by the Internal Revenue Service while still qualifying you for trader status?
The terms “DayTrader” and “Extreme Investor” have been used indiscriminately in the press and on television to describe most anyone that buys and sells stocks actively on-line. A true day trader might be said to be a trader who seldom carries a stock position overnight. An extreme investor might be further described as someone who often handles two or more round turns per trading day (one round turn being a buy and a sell). A day trader might be looking to scalp a small a few cents on a trade of 1,000 shares. He or she might only have one or two positions open at the same time so he or she can better concentrate on the tape action that signals entry and exit points.
The exchange rules for Pattern Day Trading (NYSE rule 431 (f)(8)(B)) can be very confusing and end up causing almost 99% of all unexpected trading Reg. T / SRO margin calls. The day trader’s call is due in seven days (rather than the standard fifteen day rule). If your broker has subjected you to these restrictions you are more likely than not a qualifying “day trader” for trader status purposes.
If your trading is done at an unregistered broker-dealer/investment advisor through a joint back office agreement with an LLC (where you typically have margin availability of 6 to 1 rather than the Reg. T 2 to 1 level) then again, you are more likely than not a qualifying “day trader.”
“Swing Traders” will generally maintain their stock positions somewhere between that of a day trade and a position trade. The position might be taken because you feel the stock is breaking out and you’re looking for more than just a few cents, perhaps looking for as much as a dollar or more. An experienced swing trader would likely liquidate the position if it backed off, much the same as the experienced day trader would. A swing trader might have several positions open at once, diversifying his or her account. More info.
“Position Traders” will generally maintain their stock positions somewhere between that of a swing trade and a long-term hold. The position might be taken because you feel the stock is breaking out and you’re looking for a more or a few dollars. An experienced position trader might liquidate the position if it backed off. He or she might even average up if a long position taken is progressing as expected.
Short-Term Investing and Long-Term Investing can also be done by Day Traders, Swing Traders, Position Traders and Extreme Investors. A businessperson might be wise to maintain a separate and distinct brokerage account for the short-term & long-term investing positions taken in order to keep those passive investing activities separated from the active (day, swing, position or extreme) trading activities. This distinction can become critical to the recognition of trader status, the mark-to-market election and the wash sale rule among other things.
Day Traders, Swing Traders, Position Traders and Extreme Investors qualifying for IRS Trader Status trade with continuity and regularity in speculative stock market activity, expecting to derive most of their income from short-term market swings. Simply put – Short-Term Investors and Long-Term Investors generally do not.
Just as the IRS Code does not define who or what a securities trader is, there is no distinction made among Day Traders, Swing Traders, Position Traders or Extreme Investors.