If you regularly trade the day market, you may already be aware that knowing the rules of pattern day trading, or PDT, can help you stay out of trouble. Even if you don’t intend to day trade frequently, it’s important to know exactly what a day trade is.
Understanding the Pattern Day Trader (PDT) Rule
When you execute four or more day trades within a five-business-day period using a margin account, your account will be flagged as a “pattern day trader” (PDT) by your broker. This designation comes with certain limitations and requirements, as outlined by the Financial Industry Regulatory Authority (FINRA) Let’s explore the implications of being classified as a PDT:
Maintaining a Minimum Equity of $25,000
As a PDT you are required to maintain a minimum equity of $25000 in your margin account. This minimum equity can be a combination of cash and eligible securities. If your account falls below this threshold, you will be restricted from making further day trades until the balance is restored.
Increased Buying Power
While the PDT rule imposes restrictions, it also offers an advantage in terms of buying power. As a PDT, you can trade up to four times your maintenance margin excess, compared to the typical two times for non-PDT traders. This means you can potentially make larger trades and potentially achieve higher returns.
Potential Restrictions on Day Trading
If your account equity falls below $25,000, you will be restricted from making further day trades until the balance is restored. Additionally, if you fail to meet a margin call within five business days, your trading will be limited to two times your maintenance margin excess until the call is satisfied.
Long-Term vs. Day Trading
It’s important to note that the PDT rule applies specifically to day trading activities. Long-term positions held overnight and sold before purchasing the same security the next day are exempt from the PDT designation.
Implications for Your Trading Strategy
Being classified as a PDT can significantly impact your trading strategy. If you rely heavily on day trading, you’ll need to ensure you maintain the required minimum equity. Alternatively, you may need to adjust your trading approach to focus more on longer-term positions.
Understanding the PDT Rule
The PDT rule is designed to protect investors from excessive risk associated with frequent day trading. By requiring a minimum equity level and restricting trading activity under certain circumstances, the rule aims to mitigate potential losses and promote responsible trading practices.
Additional Considerations
- Broker-Specific Policies: While the PDT rule is a general industry standard, individual brokers may have stricter interpretations or additional requirements.
- Self-Identification as a Day Trader: Some brokers allow investors to self-identify as day traders, even if they don’t meet the technical criteria.
- Impact on Margin Accounts: The PDT rule applies specifically to margin accounts, which allow investors to borrow money to amplify their trading positions.
Being classified as a PDT comes with both advantages and limitations. While you gain increased buying power, you also face restrictions and requirements regarding your account equity and trading activities. Understanding the PDT rule and its implications is crucial for making informed decisions and managing your trading strategy effectively.
Pattern day trading rules & examples
Trading rules for pattern days don’t stop trading; in fact, they can shield traders.
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The Pattern Day Trader Rule & How to Avoid It
FAQ
What happens if you get marked as a day trader?
What happens if you are classified as a day trader?
What if I get flagged as a day trader?
What happens if you are flagged as a PDT but have over 25000?
How many times a day can you day trade?
You could inform your broker (saying “yes, I’m a day trader”) or day trade more than three times in five days and get flagged as a pattern day trader. This allows you to day trade as long as you hold a minimum account value of $25,000 —just keep your balance above that minimum at all times.
Can I day trade?
This allows you to day trade as long as you hold a minimum account value of $25,000 —just keep your balance above that minimum at all times. Check out our wide range of educational resources including articles, videos, an immersive curriculum, webcasts, and in-person events.
What is a day trader?
Day traders are traders who execute intraday strategies to profit off relatively short-lived price changes for a given asset. Day traders employ a wide variety of techniques in order to capitalize on market inefficiencies, often making many trades a day and closing positions before the trading day ends.
What happens if you close a day trade?
If you close the position, you will also receive a day trade call and your account could be put on restrictions. Day trade call: If you surpass the limit on your day trading buying power and close the position in the same day, your broker will issue a day trade call, requiring you to provide more funds to return the account to compliance.