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The Pattern Day Trader (PDT) Rule is a regulation set by the U.S. Securities and Exchange Commission (SEC) that applies to traders who engage in day trading.
What Is a Pattern Day Trader?
The rule defines a pattern day trader as someone who executes four or more day trades in a margin trading account within a five-business-day period.
In a margin trading account, a pattern day trader is subject to several rules, including the requirement to maintain a minimum equity balance of $25,000 at all times. If the account balance falls below this amount, the trader may be restricted from making additional trades until the balance is restored.
Does the Pattern Day Trader (PDT) Rule Apply to Cash Accounts?
In a cash trading account, the PDT Rule does not apply, and traders can buy and sell securities as often as they like using only the funds available in their account. However, a three-day settlement rule applies, which means that funds from the sale of a security cannot be used to purchase another security until three business days have passed.
Why Does the Pattern Day Trader (PDT) Rule Exist?
The SEC implemented the PDT Rule in 2001 as a way to regulate day trading and reduce the potential for fraud and market manipulation. It also protects inexperienced and unsophisticated traders from the risks associated with day trading. Day trading involves buying and selling securities within a single trading day, and it can be a highly risky and volatile activity.
The PDT Rule also requires brokers to monitor the trading activity of their customers and enforce the rule if necessary. This helps ensure that traders are aware of the risks associated with day trading and are taking steps to manage those risks effectively.
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What Happens if You Break the Pattern Day Trader (PDT) Rule?
If you break the PDT Rule, your brokerage firm may impose restrictions on your account or take other disciplinary action. Here are some possible consequences of violating the rule:
- Account restriction: If you are classified as a pattern day trader and your account falls below the minimum equity requirement of $25,000, your brokerage firm may place a restriction on your account. This restriction may limit your ability to make trades for a certain period of time until your account balance is restored to the required minimum.
- Margin call: If your account balance falls below the margin requirement, your brokerage firm may issue a margin call, requiring you to deposit additional funds to meet the minimum requirement. If you fail to meet the margin call, your brokerage firm may liquidate your positions to cover the shortfall.
- Account suspension: In some cases, a brokerage firm may suspend your account if you repeatedly violate the PDT Rule or other trading rules. The suspension may last for a certain period of time, or the firm may terminate your account altogether.
- Regulatory action: Violating the PDT Rule may also result in regulatory action by the U.S. Securities and Exchange Commission (SEC) or the Financial Industry Regulatory Authority (FINRA). This may result in fines, penalties, or other disciplinary action.
It’s important to understand and follow the PDT Rule if you are a day trader, to avoid these consequences and to protect yourself from the risks associated with frequent day trading.
The Bottom Line
While the PDT Rule may be seen as a barrier to some traders who want to engage in frequent day trading, it ultimately exists to protect traders from the potential for significant losses and to promote market stability and integrity. By requiring traders to maintain a certain level of equity in their account, the rule helps ensure that they have the financial resources to handle the risks associated with day trading.
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FAQs
This rule states that any individual who makes four or more day trades within five business days in a margin account is considered a 'pattern day trader'. Once tagged as a PDT, the trader has to maintain a minimum account balance and faces certain restrictions on trading activities unless the designation is lifted.
What is PDT pattern day trading rule? ›
Under the PDT rule, any margin account that executes four or more day trades in a five-market-day period is flagged as a pattern day trader. Getting flagged isn't necessarily bad; it just puts the account under a little more scrutiny.
What is the PDT rule for dummies? ›
Pattern day trader: Regulations define this as someone with at least $25,000 on account, who executes four or more day trades within five business days, with those trades representing more than six percent of the customer's total trades. This is important for how the brokerage firm handles margin activity.
How do you beat the pattern day trader rule? ›
What are some ways for new traders to get around the PDT rule?
- Use a cash account. This is a little known fact that many beginner traders don't realize. ...
- Divide that capital up into multiple margin accounts. ...
- Open an offshore trading account. ...
- Buy and swing trade overnight.
Per FINRA regulation, PDT flags will remain on your account indefinitely, outside of extraordinary circ*mstances.
What is the best broker to avoid PDT rule? ›
- Brokers With No PDT Rule.
- CMEG.
- Centerpoint Securities.
- Das Trader.
- eTrade.
- LightSpeed.
- SpeedTrader.
How to Avoid the Pattern Day Trading Rule
- Open a cash account. If a day trader wants to avoid pattern day trader status, they can open cash accounts. ...
- Use multiple brokerage accounts to avoid the PDT Rule. ...
- Have an offshore account. ...
- Trade Forex and Futures to avoid the PDT Rule. ...
- Options trading.
According to FINRA rules, you're considered a pattern day trader if you execute four or more "day trades" within five business days—provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.
What is the $25,000 PDT rule? ›
Under the PDT rules, you must maintain minimum equity of $25,000 in your margin account prior to day trading on any given day. If the account falls below the $25,000 requirement, you cannot day trade until you are back at or above the $25,000 minimum.
What is the PDT reset rule? ›
What is a PDT account reset? FINRA has provided brokerage firms the ability to remove the PDT flag from a customer's account once every 180 days. If an account was erroneously flagged, and the customer's intent is not to day trade in his/her account, we have the ability to remove this flag.
The best chart patterns for day trading include the triangle, flag, pennant, wedge, and bullish hammer chart patterns. How to find patterns in day trading? To identify chart patterns within the day, it is recommended to use timeframes up to one hour.
What is the biggest mistake day traders make? ›
Here are 10 of the most common trading mistakes made by traders.
- Unrealistic expectations. ...
- Trading without a trading plan. ...
- Failure to cut losses. ...
- Risking more than you can afford. ...
- Reward/risk ratios. ...
- Averaging down or adding to a losing position. ...
- Leveraging too much. ...
- Trying to anticipate news events or trends.
Day traders use numerous intraday strategies. These strategies include: Scalping: This strategy focuses on making many small profits on ephemeral price changes that occur throughout the day. Arbitrage is a type of scalping that seeks to profit from correcting perceived mispricings in the market.
What is the 3-5-7 rule in trading? ›
What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.
How do I get rid of pattern day trader status? ›
Yes, there are two ways to have the restriction removed. You may call 855-456-7634 and request to use your one time reset request. The removal of the restriction may take 1-2 business days.
What happens if you are flagged as a PDT but have over 25,000? ›
When a customer with more than $25,000 is flagged as a PDT, the customer can day trade for unlimited times if he/she has sufficient day-trading buying power(DTBP). Your DTBP is equal to the excess maintenance margin that is available in your account multiplied by two (or by four, brokers can adjust the leverage).
What happens if you break PDT rule? ›
You usually don't have to worry about violating this rule by mistake because your broker will notify you. If you ignore their warnings, they will freeze your brokerage account for 90 days. The Pattern Day Trading rule was implemented back in 2001 as a safety feature to help reduce the risk associated with day trading.
Why can't you day trade with less than $25,000? ›
Why Do I Have to Maintain Minimum Equity of $25,000? Day trading can be extremely risky—both for the day trader and for the brokerage firm that clears the day trader's transactions. Even if you end the day with no open positions, the trades you made while day trading most likely have not yet settled.
What is the 90 day rule for PDT? ›
Duration of the Pattern Day Trader Designation: Once an account is labeled as a Pattern Day Trader, the designation will remain for 90 days unless the trader takes specific actions to remove it, such as not engaging in day trades for a certain period.
Can I buy and sell a stock in the same day? ›
The answer to your question is yes – you can buy and sell stocks the same day. In fact, this is among the most popular approaches to investing, and it's known more formally as day trading.
