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Day Trading Terminology

Learn what does - and does not - qualify as a day trade.

What is Day Trading?

Day trading is the practice of buying a security and then selling the same security in the same day. Day trading can also be selling a security short and then buying it back in the same day. As you can see, this is a short term trading method. The online trader's intention is to make a profit from the difference of the prices of these two offsetting transactions. These two trades are known as one round trip. Commonly used securities when Day Trading include shares of stock, shares of ETFs, call options, and put options,

Although this definition may seem fairly straightforward, investor confusion often arises when day trading rules are discussed. This results from a combination of two main items: misunderstood terminology and somewhat complicated rules from the Financial Industry Regulatory Authority (FINRA). There are several different ways to describe buying and selling, many of which are clarified below.

From the Long Side

Buying stock or buying securities to initiate a new position or to increase an existing position is referred to as buying long or simply long. This is also known as going long, buying to open, or an opening purchase. All of these terms are opening transactions.

To exit or offset a long stock or securities position or to reduce a current position, an online trader would sell. This is also referred to as selling long, selling out, selling to close, or a closing sale. These are all different ways to describe a closing transaction, liquidating, or exiting.

From the Short Side

Selling stock or selling securities to establish a new position or to increase an existing position is known as selling short. Other similar terms include going short, selling to open, or an opening sale. Even though we are talking about selling, these are also opening transactions.

To offset or exit a short stock or securities position or to reduce a current position, an online trader would buy. This may also be called buying to cover, buying to close, covering a short, buying in shorts, or a closing purchase. Although we are referring to buying, all of these terms denote a closing transaction, liquidation, or an exit.

Opening and closing transactions

As you can see, it cannot be determined if a transaction is opening or closing just by knowing which side of the market the online trader is on. Selling can be either opening or closing. The same is true for buying; it can be opening or closing.

Day Trading Definition Revisited

Now that we have clarified many commonly used and misused trading terms, let's restate the above definition. At the most basic level, a Day Trade is two transactions in the exact same security (one round trip) that occur on the same day. The first transaction must be opening; the second one follows as closing. The order of these offsetting transactions must be maintained to be deemed a day trade. Provided that these trades occurred on the same day, the execution time does not matter. Trades executed in the pre- and post-market follow the same criteria; all that is relevant is that a position is not held overnight in order to be a day trade.

What is Not a Day Trade?

As an example, an online trader opened a position yesterday and held it overnight. The next day the trader liquidates the position. Later the same day the trader re-establishes the position held the previous day. This series of trades is not considered a Day Trade because the order of the transactions that occurred today is closing followed by opening.

Learn more about Day Trading Rules

TradeKing provides all the resources an online trader needs. From Advanced Order entry to Technical Analysis Education, to helping the online trader understanding day trading rules, TradeKing offers great features short term traders need to be competitive in today's fast paced market.

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