What is the Pattern Day Trading Rule?
As a frequent trader, if you make 4 or more day trades in a 5 trading day period, unless your day trading activities are less than 6% of your total trading activity for that time period, you will be labeled a pattern day trader. Traders that are labeled as pattern day traders (PDT's) are required to maintain at least $25,000 worth of equity in their account on any day they process a day trade.
For newer traders who are unsure, the definition of a day trade is any trade that is opened and closed on the same trading day. As a side note, if you open a position and then use two orders to close the same trade, it only counts as 1 day trade.
Of course, there are ways around this rule. See Ways to Avoid the Pattern Day Trading Rule to sidestep these policies.
Should a pattern day trader exceed the day-trading buying power limitation granted by your broker, the brokerage will issue a day-trading margin call (DT Margin) to the trader's account. The pattern day trader then has 5 business days to deposit funds to meet this "DT Margin Call." During this 5 day period, until this margin call is met, the account is restricted to day-trading buying power of only two times maintenance margin. Should the day-trading margin call not be met by the fifth business day, the account is restricted further to trading only on a cash basis (margin account suspension, cash account only) for 90 days or until the call is met.
If you have any questions or comments please feel free to post them in the comments section. Remember to utilize your "Trader Mentality" and happy trading!
Labels: Trading Strategy
