Note: The mechanics of the pattern day trading rule are explained here solely for educational purposes. It is your responsibility to comprehend pattern day trading and to keep the $25,000 minimum equity required to participate in pattern day trading.
In a five-day trading period, you are typically only allowed to make three day trades unless you had at least $25,000 in equity in your account at the end of the day before. It may sound complex, but all it really means is that you couldn’t day trade today unless your account value was greater than $25,000 at the end of yesterday.
We only consider the closing balance of the previous trading day, so your portfolio value may fluctuate above $25,000 at some point during the trading day. Click the Day Trade Counter button in your Account Report under the TRADE tab section of your trading platform to see if you are prohibited from day trading on any given day. You can day trade if the popup says “No round trip limitation” and your balance is more than $25,000.
The five-trading-day window doesn’t necessarily align with the calendar week. For example, Wednesday through Tuesday could be a five-trading-day period. Your account will be flagged for pattern day trading for ninety calendar days if you execute your fourth day trade within the five-day window. This means that until you raise your account equity above $25,000, you will not be able to execute any day trades for ninety days.
As a first-time investor, understanding the intricacies of the stock market can be overwhelming. One such aspect is the Pattern Day Trading (PDT) rule which can significantly impact your trading activities. This comprehensive guide will delve into the nuances of the PDT rule providing clear explanations and practical examples to help you navigate this regulation with confidence.
What is the Pattern Day Trading Rule?
The PDT rule, implemented by the Financial Industry Regulatory Authority (FINRA), restricts the number of day trades you can make within a five-day period A day trade occurs when you buy and sell a security on the same trading day. If you have less than $25,000 in your account, the PDT rule limits you to three day trades within a five-day period. Exceeding this limit can result in a 90-day restriction on day trading activities.
How Does the PDT Rule Work?
Key Points:
- Account Balance Threshold: The PDT rule applies only if your account balance falls below $25,000 at the end of the previous trading day. If your account value exceeds this threshold, you are exempt from the PDT rule.
- Five-Day Trading Window: The five-day window for calculating day trades does not necessarily align with the calendar week. It can start on any day and includes the next four trading days.
- Day Trade Counting: Each instance of buying and selling the same security on the same day counts as one day trade, regardless of the number of shares involved.
Examples:
- Scenario 1: You have an account balance of $20,000. On Monday, you buy 100 shares of ABC stock and sell them later in the same day. This counts as one day trade.
- Scenario 2: On Tuesday, you buy 50 shares of XYZ stock and sell them on the same day. This is another day trade, bringing your total day trades for the five-day window to two.
- Scenario 3: On Wednesday, you buy 25 shares of DEF stock and sell them on the same day. This is your third day trade within the five-day window.
- Scenario 4: On Thursday, you attempt to buy and sell 100 shares of GHI stock on the same day. However, your account balance is still below $25,000. Since this would be your fourth day trade within the five-day window, your account will be flagged for violating the PDT rule.
Consequences of Violating the PDT Rule
If you exceed the PDT limit, your account will be restricted from day trading for 90 calendar days. This means you will not be able to buy and sell the same security on the same day during this period. You can still hold and trade other securities, but you cannot engage in day trading activities.
How to Avoid Violating the PDT Rule
- Maintain a $25,000 Account Balance: The most effective way to avoid violating the PDT rule is to ensure your account balance remains above $25,000 at the end of each trading day.
- Track Your Day Trades: Keep a close eye on your day trade count within the five-day window. You can use the Day Trade Counter feature on your trading platform to monitor your activity.
- Consider Swing Trading: If you are unable to maintain a $25,000 account balance, consider swing trading instead of day trading. Swing trading involves holding securities for a longer period, typically days or weeks, rather than buying and selling them within the same day.
The Pattern Day Trading Rule can be a complex regulation, but understanding its nuances is crucial for first-time investors. By following the guidelines outlined in this guide, you can navigate the PDT rule effectively and avoid any potential restrictions on your trading activities. Remember, responsible trading practices and a thorough understanding of the rules are key to success in the stock market.
Day Trade Counter You can see how many day trades you’ve made in the current five-trading-day period:
- In the upper left corner of your trading software, tap the TRADE tab.
- Tap Account Report
- Tap Day Trade Counter
- Buy 1 ABC
- Sell 1 ABC
Because you bought and sold ABC on the same trading day, this is a one-day trade.
Day Trade = (Buy 1 ABC, Sell 1 ABC).
- Buy 1 ABC
- Sell 10 ABC
This is one day trade.
With the initial purchase, you created a new position in ABC even though you already own 10 shares.
Day Trade = (Buy 1 ABC, Sell 10 ABC).
- Sell 10 ABC
- Buy 5 ABC
- Sell 5 ABC
This is one day trade.
It doesn’t count toward your day trades because your initial transaction for ABC was selling ABC that you already owned from a prior day.
Day Trade = (Buy 5 ABC, Sell 5 ABC).
- Buy 1 ABC
- Buy 2 ABC
- Buy 7 ABC
- Sell 1 ABC
- Sell 5 ABC
- Sell 4 ABC
Because there is only one direction change between buys and sells, this is a one-day trade.
Day Trading = (Sell 1 ABC, Buy 2 ABC, Buy 7 ABC)
Examples of Two Day Trades
- Buy 50 ABC
- Sell 15 ABC
- Sell 35 ABC
- Buy 10 ABC
- Sell 10 ABC
Because there are two shifts in direction from buys to sells, these are two day trades.
Day Trade 1: (50 ABC Purchased, 15 ABC Sold, 35 ABC Sold) Day Trade 1 = (Buy 10 ABC, Sell 10 ABC).
An order you place won’t be considered a day trade until it executes. On the other hand, an open order that you have placed but not yet executed will show up in your Day Trade Counter as a day trade. This feature was created to inform you that you will have completed another day trade if your order executes.
Why I Only Take One Trade A Day (Beginner friendly)
FAQ
How many trades can you do in a day?
What is the 3 5 7 rule in trading?
How many trades can you make in a day without 25k?
Can I make unlimited day trades?
How many day trades can I make in a day?
A: The number of day trades that you can make in a day varies on the amount of money in your account. However, if your account has less than $25,000, you are only allowed to make three-day trades in five days. If you exceed this your account could be flagged, blocking your account from any day trades for 90 days.
How many dates can one consume per day?
This will depend on many factors that influence your daily calories and carbohydrate requirements. Dates are high in sugar, and dried dates have even more calories because the sugar is concentrated. A person with an average caloric expenditure of 2, 000kcal can consume between 2 and 3 dates per day, but an athlete or regular practitioner of some sport may need to consume more.
How much money does a day trader need?
For most traders to be able to take advantage of day trading, they are required to have at least $25k in their account. This is the pattern day trader rule. (For this post I will be focusing on Margin Accounts, which is the type of account that a lot of options traders use)
How many day trades can a trader execute?
First off, a trader can execute up to three day trades within five business days. The sum total of the trades is not restricted, so if Cody does three large day trades per week and receive large profits, it can work for him.