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Pattern Day Trader Rule

The Pattern Day Trader (PDT) rule limits the number of day trades one can make in a margin account with less than $25,000 within a rolling five-day period. The rule was established by the Financial Industry Regulatory Authority (FINRA) in 2001 to protect novice investors from significant losses. Questions asked by new traders are often what constitutes a day trade, how do accounts get flagged as pattern day traders, and what are the implications of being flagged, such as maintaining a minimum equity of $25,000.

Significant Points

The PDT rule restricts the number of day trades in a margin account with less than $25,000 within a five-day period.

An account is flagged as a pattern day trader if it executes four or more day trades within any rolling five business day period.

Once flagged, the account must maintain a minimum equity of $25,000, or it may face restrictions.

A day trade is defined as a complete entry and exit of a stock, options, or ETF position within a single trading day.

For Example

The Pattern Day Trader (PDT) rule is a regulation enforced by the Financial Industry Regulatory Authority (FINRA) and is applicable to traders in the United States. Here are the specific requirements and implications of the PDT rule:

Requirements for Being Flagged as a PDT

Account Type: The rule applies to margin accounts, not cash accounts. This is important. If you are a trader with less than $25,000 in your account, set up a separate account without margin to trade JTNC service and you will avoid any PDT regulations.

Number of Trades: The account must execute four or more day trades within a rolling five-business-day period.

Percentage of Activity: Those day trades must constitute more than 6% of the account's total trading activity during that five-day window.

Implications of Being Flagged as a PDT

Minimum Equity Requirement: Once an account is flagged as a pattern day trader, it is required to maintain a minimum equity of $25,000 at all times.

Equity Calculation: The $25,000 requirement can be a combination of cash and eligible securities.

Trading Limitations: If the account falls below the $25,000 requirement, the trader will not be allowed to day trade until the minimum equity level is restored.

90-Day Freeze: An account that fails to meet the $25,000 equity requirement could be frozen for up to 90 days, preventing any day trading activities.

Leverage Restrictions: Being flagged as a PDT often subjects the trader to different margin requirements, which could potentially limit the leverage that can be used for trading.

Definition of a Day Trade

A day trade is a trade where a security is bought and sold, or sold short and then bought back, on the same day. This applies to stocks, options, and ETFs.

The rule applies to both long and short trades and includes pre-market and post-market trading.

Exceptions

Trades that are part of a hedge, or trades where positions are held overnight and sold the next day, are generally not counted towards the PDT rule.

Understanding the PDT rule is crucial for risk management and operational efficiency, especially for traders who engage in frequent intraday trading. Failure to comply can result in severe restrictions that could hamper trading activities.