Key Takeaways
- Four+ day trades in five days triggers PDT status.
- Must maintain $25,000 minimum equity in margin account.
- Day trading buying power up to 4x maintenance margin.
- Violating margin calls leads to trading restrictions.
What is Pattern Day Trader?
A pattern day trader (PDT) is an investor who executes four or more day trades within five business days, where those trades account for more than 6% of their total trading activity in a margin account. This designation triggers specific margin requirements regulated by FINRA to mitigate risk for active traders.
The PDT rules apply exclusively to margin accounts and are designed to protect both traders and brokerages from excessive risk exposure during frequent intraday trading.
Key Characteristics
Pattern day traders must comply with distinct rules that differentiate them from occasional traders:
- Trade frequency: At least four day trades within five business days, representing over 6% of total trades in the margin account.
- Minimum equity: Maintain a $25,000 minimum equity balance at all times in the margin account.
- Day trading buying power: Allowed up to four times the maintenance margin excess from the previous day’s close.
- Margin calls: Must meet any day trading margin calls within five business days to avoid account restrictions.
- Permanent designation: Once flagged, the pattern day trader status generally remains unless a broker allows a one-time removal.
How It Works
When you meet the PDT criteria, your brokerage requires you to maintain a minimum equity of $25,000 in your margin account before engaging in day trading. This threshold must be met at the start of each trading day to avoid restrictions.
Your day trading buying power increases to four times your maintenance margin excess, enabling more aggressive position sizing. However, exceeding this limit triggers a margin call, which you must satisfy within five business days by depositing funds or liquidating positions, or else your account will face limitations such as a 90-day cash restricted status.
Examples and Use Cases
Understanding PDT rules is essential for active traders and those interested in frequent market engagement:
- Airlines: Investors day trading shares of Delta or American Airlines must be aware of PDT rules when executing multiple trades within short periods.
- Growth stocks: Traders focusing on fast-moving growth stocks often hit PDT thresholds due to volatility and frequent buying and selling.
- Commission-free brokers: Choosing platforms from the best commission-free brokers can reduce costs but does not exempt you from PDT rule compliance.
Important Considerations
Keep in mind that PDT rules apply only to margin accounts; switching to a cash account removes these restrictions but also limits your ability to trade on margin. Deposits made to meet margin calls must remain in the account for at least two business days before they count toward equity requirements.
It’s also useful to understand related concepts like haircuts in margin calculation and how a T-account reflects your margin balances, which can impact your day trading capacity and compliance with PDT rules.
Final Words
Pattern Day Trader rules require maintaining a $25,000 minimum equity and limit day trading activity to manage risk. Review your trading frequency and account balance to ensure you meet these requirements before executing multiple day trades. Consider consulting your broker to clarify how these rules apply to your specific trading strategy.
Frequently Asked Questions
A Pattern Day Trader is defined by FINRA as someone who executes four or more day trades within five business days, with those trades making up more than 6% of their total trades in a margin account during that period.
A day trade involves buying and selling, or short selling and covering, the same security on the same day. For example, selling short 250 shares in the morning and buying them back in the afternoon counts as one day trade.
Once flagged as a Pattern Day Trader, you must maintain a minimum equity of $25,000 in your margin account at all times. This amount must be deposited before day trading and is a permanent requirement.
Pattern Day Traders have up to four times their maintenance margin excess available for day trading based on the previous day's closing balances, allowing for more aggressive trading than non-day traders.
If you exceed your day trading buying power, you will receive a margin call with five business days to meet it. Failure to do so can lead to restrictions like a 90-day cash restricted account status with limited buying power.
If you do not meet the Pattern Day Trader criteria, you only need a minimum of $2,000 in equity to trade on margin. However, once designated as a PDT, the $25,000 minimum equity is mandatory.
PDT rules are FINRA regulations applied uniformly by all brokerages, but some brokers may have slightly different definitions or implementations, so it's important to check your broker’s specific criteria.
