Like all U. S. -based brokers, Robinhood adheres to the guidelines established by the Financial Industry Regulatory Authority for pattern day traders (PDTs) (FINRA)
According to these guidelines, a PDT is anyone who completes four or more day trades in a margin account in a five-day span. Additionally, you need to have a minimum of $25,000 in your account to trade day using the Robinhood pattern.
Fortunately, there are ways to get around this and day trade on Robinhood without having to keep this much money in your account.
If Robinhood detects that you are a regular day trader and your account balance is less than $25,000, the app may prevent you from placing another trade for a period of ninety days.
If you have been penalized, you have two options: either wait out your 90-day account freeze or add funds to your account until it has at least $25,000.
We’ll go into more detail about pattern day trading in this guide, along with what to do if Robinhood flags your account.
Robinhood has become a popular commission-free trading platform, attracting many active traders. However it’s crucial to understand the implications of being marked as a pattern day trader (PDT) on Robinhood. This article will explore the consequences and restrictions you may face as a PDT on Robinhood.
What is a Pattern Day Trader (PDT)?
A pattern day trader is an individual who executes four or more day trades within five business days using a margin account. Day trading refers to the practice of buying and selling the same security on the same day, aiming to profit from small price movements.
Consequences of Being Marked as a PDT on Robinhood
Being marked as a PDT on Robinhood comes with several downsides that can negatively impact your account, These consequences include:
Account Restriction: Once marked as a PDT on Robinhood, your account will be subject to certain restrictions to ensure compliance with FINRA regulations
Minimum Equity Requirement: As a PDT, you must maintain a minimum equity of $25,000 in your margin account on any day you engage in day trading activities. Falling below this requirement will result in account restrictions.
Day-Trading Buying Power Limitation: PDTs on Robinhood are subject to a day-trading buying power limitation, generally up to four times the maintenance margin excess as of the previous day’s close. Exceeding this limit will trigger a margin call.
Margin Call: If you exceed the day-trading buying power limit, Robinhood will issue a margin call. You will have five business days to deposit funds to meet the call. Failure to do so will result in further account restrictions.
Account Restrictions: Failing to meet the margin call within the specified timeframe will restrict your account to trading only on a cash available basis for 90 days or until the call is met. During this period, you will not have access to day-trading buying power.
Is Pattern Day Trading on Robinhood Right for You?
Pattern day trading involves risks and requires a thorough understanding of trading strategies and market dynamics. It may not be suitable for individuals with limited resources, experience, or low risk tolerance. Before engaging in pattern day trading on Robinhood, carefully consider your investment objectives and risk tolerance.
How to Avoid Being Marked as a PDT on Robinhood
If you want to avoid being marked as a PDT on Robinhood, you can take the following steps:
- Limit your day trades to three or fewer per five business days.
- Use a cash account instead of a margin account. Cash accounts are not subject to PDT rules.
- Maintain a portfolio value of at least $25,000. This will allow you to continue day trading even if you are marked as a PDT.
Being marked as a PDT on Robinhood can have significant consequences for your account. Before engaging in day trading, it’s crucial to understand the risks and restrictions involved and determine whether it aligns with your investment goals and risk tolerance. By taking the necessary precautions, you can avoid being marked as a PDT and continue trading on Robinhood without limitations.
What Is a Robinhood Pattern Day Trader?
According to FINRA, a pattern day trader is anyone who executes four or more day trades within five consecutive trading days.
Anytime you open and close a stock position during the same trading day, you are executing a day trade.
Day trading has become wildly popular lately. Apps for brokers like Robinhood simplify investing and typically charge no fees for most trades.
But day trading is super-speculative. Day traders look for volatile stock moves and dive in. That can, as you can imagine, result in more losers than winners.
What’s more, most day traders trade on margin. This implies that they take out a loan from their broker in order to increase their leverage when purchasing a position.
Of course, the broker charges interest on the margin loan. Because you will have to pay back the loaned amount plus interest, day trading in a margin account becomes especially risky and you could lose more than your initial investment.
By restricting multiple day trades to investors who have sufficient funds to cushion their margin accounts to absorb these losses, FINRA has made an effort to reduce this risk. Hence the PDT rule.
What Happens If You’re Flagged as a Robinhood Pattern Day Trader?
It can happen surprisingly quickly when you trade stocks on Robinhood and are reported as a pattern day trader.
This is due to the fact that all Robinhood users initially have a margin account.
You can make trades with Robinhood Instant Accounts before your money is formally settled. That means that even if you don’t use a margin trading strategy, they are technically margin accounts.
Furthermore, since these are margin accounts, you may, you guessed it, be reported as a pattern day trader if you make and close four or more trades in a five-day span.
Generally, if Robinhood flags you as a PDT, your account will be blocked for ninety days. This implies that you will not be able to trade for approximately three months.
In the event that you fund your account with at least $25,000, the 90-day freeze penalty will be lifted. You may have to pay additional fines if you fall below the $25,000 account minimum again because you will still be identified as a Robinhood pattern day trader for 90 days.
I Got Flagged As A Pattern Day Trader On Robinhood!
FAQ
What happens if you are flagged as a pattern day trader on Robinhood?
What happens if you break the pattern day trader rule?
What happens when you are labeled a pattern day trader?
What if I’m flagged as a pattern day trader?
If you’re currently flagged as a pattern day trader, you may be eligible for a one time removal of your pattern day trading flag and/or associated restrictions. View your options here. Pattern Day Trade Protection alerts you when you’re about to place a 4th day trade.
What is pattern day trade protection?
Pattern Day Trade Protection alerts you when you’re about to place a 4th day trade. This feature will give you the option to proceed with the 4th trade, or cancel it to avoid being marked as a pattern day trader. For more details, check out Pattern Day Trade Protection.
How long does a pattern day trader last?
Any investor who places four day trades within a window of five consecutive business days will have their account flagged as a pattern day trader. This designation lasts for 90 days. The result is not being able to make any day trades for that period of time.
Do pattern day trading restrictions apply to non-margin accounts?
You’ve made a day trade when you buy and sell (or sell and buy) the same security within a single trading day. Pattern day trading restrictions don’t apply to non-margin accounts, they only apply to margin accounts. This means you can trade securities in a non-margin account without worrying about your number of day trades.