Pattern day trading is a designation for a stock trader who executes four or more day trades in five business days in a margin account. A day trade refers to buying and selling (or selling and buying) the same security in a margin account on the same day in an attempt to profit from small movements in the price of the security. Here are some key points to understand about pattern day trading:
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Regulations: Pattern day trading is regulated by the Financial Industry Regulatory Authority (FINRA) . Brokers automatically flag pattern day traders, and PDTs are subject to additional regulatory scrutiny and limitations.
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Requirements: 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% of your total trades in the margin account for that same five business day period. Pattern day traders are required to hold $25,000 in their margin accounts. If the account drops below $25,000, they will be prohibited from making any further day trades until the balance is brought back up.
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Restrictions: Pattern day traders are subject to additional restrictions, such as being prohibited from trading in a cash account. If a trader is flagged as a pattern day trader, they may be eligible for a one-time removal of the pattern day trading flag and/or associated restrictions.
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Counting day trades: There are two methods of counting day trades, and individual brokerage firms may have stricter interpretations of them.
Its important to note that pattern day trading rules are defined by FINRA, but individual brokerage firms may have stricter interpretations of them.
