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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 pass the PDT rule? ›
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.
Who Is a Pattern Day Trader? 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 happens if you are flagged as a pattern day trader? ›
What happens if I'm flagged as a patter day trader? Once your account triggers the PDT rules, your broker can issue you a margin call if you hold less than the minimum PDT equity requirement. You have, at most, five business days to deposit funds or eligible securities or raise your account to meet the call.
What is the best broker to avoid PDT rule? ›
- Brokers With No PDT Rule.
- CMEG.
- Centerpoint Securities.
- Das Trader.
- eTrade.
- LightSpeed.
- SpeedTrader.
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.
What is an example of a PDT? ›
Example of the Pattern Day Trader Rule
Let's say John has a $1,000 trading account. On Monday he day trades Apple stock, Tuesday he day trades Tesla, Wednesday he trades Exxon. He's made his three-day trades, and won't be able to make another day trade again until Monday.
What is PDT strategy? ›
A pattern day trader (PDT) is a regulatory designation for those traders or investors who execute four or more day trades over the span of five business days using a margin account. The number of day trades must constitute more than 6% of the margin account's total trade activity during that five-business-day window.
The strategy is very simple: count how many days, hours, or bars a run-up or a sell-off has transpired. Then on the third, fifth, or seventh bar, look for a bounce in the opposite direction. Too easy? Perhaps, but it's uncanny how often it happens.
What happens if you violate PDT rule? ›
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.
How long does the PDT flag last? ›
Per FINRA regulation, PDT flags will remain on your account indefinitely, outside of extraordinary circ*mstances. What can I do? Make sure Pattern Day Trade Protection is enabled. These are a series of in-app notifications that let you know when your account is approaching or at risk of a PDT flag.
What is the most successful day trading pattern? ›
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 golden rule of day trading? ›
Before entering a trade, it's essential to have a well-defined plan. This includes setting your entry and exit points, determining your risk-reward ratio, and conducting thorough market analysis. By planning your trades in advance, you increase your chances of making profitable decisions.
What are the new PDT rules? ›
FINRA just made updates to their pattern day trader (PDT) rule that punishes violators much more harshly. Here's a quick rundown on what that means: The Pattern Day Trader (PDT) rule allows for no more than three (3) day trades within a rolling five day period, if the account has less than $25,000.
What happens if you break PDT rule? ›
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.
Does PDT rule apply to everyone? ›
This rule only applies to margin accounts and IRA limited margin accounts. If your account is flagged for PDT, you're required to have a portfolio value of at least $25,000 to continue day trading. Your portfolio value is the sum of your cash, stocks, and options, and doesn't include crypto positions.
How many times can you day trade without 25k? ›
PDT Rule. Any US-based prospective day trader quickly learns about the dreaded pattern day trader (PDT) rule. The PDT essentially states that traders with less than $25,000 in their margin account cannot make more than three day trades in a rolling five day period.
