Are you a novice trader and don’t know what the pattern day trader rule is? Or are you concerned about the consequences of the pattern day trade? Then this guide is for you.In this post, we will uncover what pattern day trader rules are with comprehensive examples and how you can avoid it, so make sure to stay with us until the end.
Table of Contents
What is a Pattern Day Trader Rule?
So, simply said, a pattern day trader is a trader who sells and buys stocks or other securities within the same day frequently. The “pattern” refers to the part where the traders make at least four(Or more) such trades within a five-business-day period.
But that’s not all, only traders with a margin account can be classified as a pattern day trader. Pattern day traders can have some regulatory implications such as: If you find yourself making day trades that make up more than 6% of all your trades in five days, your broker might label you as a Pattern Day Trader rule (PDT).
Example of Pattern Day Trader Rule
Let’s understand a pattern day trader rule a bit better with an example. So imagine there is a trader named Tom. Tom has a margin account with a brokerage firm and has been doing trades for a while, but typically makes a couple of trades each week.
This week, Tom decides to try day trading. He starts to buy and sell Stock A four times in a single day. In this way, she can take advantage of the short-term price movements. The next day, he does the same thing with a different stock. Over the week, he makes a total of six-day trades.
Tom’s broker realizes that these trades now make up more than 6% of all her trading activity during that week. So Tom’s broker flagged Tom’s account as a PTD( Pattern Day Trader) which comes with some set of rules. For example, once you are classified as a Pattern Day Trader (PDT), you need to maintain a minimum account balance of $25,000 to continue day trading.
What Regulations do Pattern Day Traders Have?
Pattern Day Traders (PDTs) are obligated to specific regulations imposed by the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Here are some of them that you need to know:
Minimum Account Balance: As we said before, if you want to be a Pattern Day trader Rule Follower, you need to have a minimum account balance of $25,000. This balance needs to be kept at all times and is the key requirement for continuing day trading.
Day Trade Buying Power: So pattern day traders have an additional buying power in their margin account that is typically four times the trader’s maintenance margin excess. This can vary depending on the trader’s broker.
Margin Requirements: Pattern day traders must adjust to specific margin requirements set by their broker and regulatory authorities. These requirements dictate the amount of equity that must be maintained in the account to support trading activities.
Educational Resources: Brokers are required to provide educational resources and risk disclosure information to pattern day traders to make sure that they understand the risks associated with day trading.
Why has my broker flagged me as a pattern day trader rule?
Well, if you are flagged by your broker as a pattern day trader rule, it means you did some activities that indicated you as a PTD. This means you either had more than three-day trades within a rolling five-business-day period with a margin account of less than $25,000. Overall, you can review your trading activities and see where you went to become a pattern day trader rule.
What is A Day Trade?
Simply put a day trade is when you as a trader sell and buy securities within the same day and don’t hold it overnight. Day trading is typically characterized by short-term trading strategies, aiming to profit from day trading price movements.
If you want to know more about day trading, we have a full guide on how it works and what additional things you need to know as a beginner trader at Ultimate Beginner’s Guide to Day Trading.
What to do if my account is flagged?
If your account has been flagged as a pattern day trader rule, these are the things that you need to do first:
- Review Your Trading Activity: Take a close look at your trading activities and see if you have done any sorts of activities that indicate you as a pattern day trader rule.
- Communicate with Your Broker: Contact your broker’s customer service or compliance department to clarify why this happened. Also, ask for specific details and how you can get past this if it wasn’t your goal to become a pattern day trader rule.
- Assess Your Options: Depending on the reasons that you are flagged, you might want to reconsider your trading goals and strategies. You might have to reduce your trading sessions or increase your account balance.
- Address Margin Calls: Well, If your account was flagged due to margin call violations, take action immediately to address any outstanding margin calls by depositing additional funds into your account or closing out positions to reduce leverage.
- Educate Yourself: Take this opportunity to educate yourself more about the PTD and other rules of trading so you can avoid such situations.
- Seek Professional Advice: If you are not sure how to go on in trading and avoid being in these situations, it is highly advised to have an advisor. You can use FREE DISCOVERY CALL With Meta Trading Club, as a starter to find out what you need and don’t based on your trading goals.
How long does it take for my account to be free?
If your account has been flagged as a pattern day trader rule, the time it takes to be free depends on different factors, including the specific reason for the flagging and how quickly you can rectify the issue.
But overall, the duration of this process takes somewhere between a few days to several weeks. For this process to be quicker, it is advised to communicate with your broker, follow their guidance, and take proactive steps to rectify any violations or discrepancies to expedite the process.
How to avoid the pattern day trader rule?
To avoid being flagged as a pattern day trader rule , there are several things you can do, such as:
- Maintain a Balance Above $25,000:
The most straightforward way to avoid being classified as a PDT is to maintain a minimum account balance of $25,000 in your margin account. With this balance, you have the freedom to execute as many day trades as you want without being subject to the PDT rule.
- Trade Cash Accounts:
You can choose to trade with a cash account instead of a margin account. In using a cash account, you’re limited by the funds you have available to trade, but you’re not subject to the same regulations as margin accounts, including the PDT rule. But you have to remember, with a cash account you will lose the leverage you have in a margin account.
- Limit Day Trade Frequency:
One of the easiest ways to avoid PTDs is to limit your trading session as much as you can. In this way, you are sure that you will not be flagged as a pattern day trader in any way.
- Diversify Your Trading Strategies:
Instead of focusing only on one trading strategy like day trading, consider diversifying your trading strategies. You can try other strategies such as swing trading, position trading, or long-term investing alongside your day trading activities. By spreading out your trades over different time frames, you can reduce the likelihood of being classified as a PDT.
- Use Alternative Investment Vehicles:
You can trade in other investment vehicles such as options trading or trading in futures or forex markets. These markets have different regulations and offer more flexibility in terms of day trading activity.
- Stay Informed:
Always, stay informed about trading regulations and monitor your trading activities closely to avoid any unwanted situations.
Last Words
In this post, we took a look at what is a pattern day trader rule and how you can become one if you want to. Also, we gave some advice on how to unflag your account if you were flagged as a PTD. If you like this post, I suggest you take a look at our other beginner-friendly blogs as we have been breaking down trading terms to the beginner level.
Frequently asked question
Well, the risks of being classified as a PDT include the potential for trading restrictions, account closures, or regulatory penalties for non-compliance with PDT regulations.
You can monitor and analyze your trading activities through your broker’s account or keep detailed activity reports by yourself.
Yes, you totally can be classified as a PDT if your broker decides that you’re engaging in a pattern of day trading activity. This can happen, even if you haven’t met the specific day trade frequency requirement. Brokers mostly use their discretion to classify traders as PDTs based on their overall trading behavior and patterns.
Well, Yes, there are some exceptions to the Pattern day trader rule such as: If you use a cash account or trade in a non-marginable security. Also if you have more than $25,000 in your account you are no longer obligated to PTDs rule.
Well, your day trade buying power as a PDT is typically four times your maintenance margin excess. What is that you may ask? So, Maintenance margin excess is the difference between your margin equity and your margin requirement. You can calculate your day trade buying power using the formula provided by your broker.
Your broker is obligated to provide educational resources and risk disclosure information to help you understand and comply with PDT regulations. Also, you can go to some regularity websites such as the U.S. Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA).
Well, Some traders want to avoid being classified as PDTs because it comes with specific regulations, such as maintaining a minimum account balance and limiting day trade frequency. These regulations can restrict trading flexibility.
Yes they are. For example, cash accounts don’t have the same-day trade restrictions as margin accounts, but you’re limited to trading with the funds you have available.
