The Pattern Day Trader (PDT) rule is one of the most significant regulations affecting retail traders in the United States. If you want to actively day trade stocks or options, understanding this rule is essential to avoid account restrictions and potential violations. This comprehensive guide explains everything you need to know about the PDT rule and how to work within its constraints.
What Is the Pattern Day Trader Rule?
The Pattern Day Trader rule is a FINRA (Financial Industry Regulatory Authority) regulation that requires traders who execute four or more day trades within five business days to maintain a minimum account equity of $25,000. This rule applies to margin accounts at US broker-dealers.
The key threshold: If you make 4 or more day trades in a 5-business-day period, and those day trades represent more than 6% of your total trades during that period, you are classified as a Pattern Day Trader.
What Counts as a Day Trade?
A day trade occurs when you buy and sell (or sell short and cover) the same security on the same trading day. Here are specific examples:
- Stock day trade: Buy 100 shares of AAPL at 9:30 AM, sell at 2:00 PM
- Options day trade: Buy a call option at 10:00 AM, sell at 3:00 PM
- Short sale day trade: Short 50 shares at market open, cover before close
What Does NOT Count as a Day Trade
- Buying today and selling tomorrow (swing trade)
- Buying in a cash account and selling after settlement
- Holding overnight and selling the next day
Example: Counting Day Trades
Over five business days, you make these trades:
- Monday: Buy TSLA, sell TSLA same day (1 day trade)
- Tuesday: Buy NVDA, hold overnight (0 day trades)
- Wednesday: Sell NVDA from Tuesday, buy AMD hold overnight (0 day trades)
- Thursday: Buy SPY calls, sell same day; Buy QQQ puts, sell same day (2 day trades)
- Friday: Buy MSFT, sell same day (1 day trade)
Total: 4 day trades in 5 days. You would be flagged as a Pattern Day Trader.
The $25,000 Minimum Requirement
Once flagged as a PDT, you must maintain at least $25,000 in your margin account at all times. This requirement has several important details:
- Cash and securities count: The $25,000 can be a combination of cash and marginable securities
- Must be maintained daily: Your equity must be at least $25,000 before any day trading activity
- Deposited funds have a holding period: Funds deposited to meet the minimum must remain in the account for at least two business days
- Cross-guarantee prohibited: You cannot use funds from other accounts to meet the requirement
What Happens If You Violate the PDT Rule?
If you are flagged as a PDT without maintaining the $25,000 minimum, your broker will take action:
- Day trade call: You will receive a margin call requiring you to deposit funds
- Account restriction: Your account may be restricted to closing transactions only
- 90-day freeze: Some brokers impose a 90-day restriction where you cannot day trade
- Buying power reduction: Your day trading buying power may be reduced or eliminated
Warning
Each broker handles PDT violations differently. Some are more lenient and may offer a one-time reset, while others strictly enforce the 90-day restriction. Check your broker's specific policies.
Day Trading Buying Power
Once you meet the PDT requirements, you receive special day trading buying power. This is typically four times your maintenance margin excess, calculated at the close of the previous trading day.
Example: Day Trading Buying Power
Your account has $30,000 in equity. Your overnight margin requirement is 50%, so your maintenance excess is calculated as:
- Account equity: $30,000
- Day trading buying power: $30,000 x 4 = $120,000
You can buy up to $120,000 worth of stock for day trading. However, you cannot hold this amount overnight.
Strategies for Traders Under $25,000
If you have less than $25,000, you still have legitimate options to trade actively:
1. Use a Cash Account
The PDT rule only applies to margin accounts. In a cash account, you can day trade as much as you want, provided you have settled funds. The catch is that stock trades take T+1 to settle (one business day after the trade).
2. Trade Futures Instead
Futures contracts are not subject to the PDT rule because they are regulated by the CFTC, not FINRA. Many brokers allow futures trading with accounts as small as $500 to $2,000.
3. Limit Day Trades to 3 Per Week
You can make up to 3 day trades in a rolling 5-business-day period without triggering the PDT designation. Plan your trades carefully to stay under this limit.
4. Swing Trade Instead
By holding positions overnight, you avoid day trades entirely. Many successful traders find swing trading (holding for days to weeks) to be more profitable with less stress.
5. Use Multiple Broker Accounts
You can have accounts at multiple brokers and use 3 day trades at each. However, this requires more capital spread across accounts and careful tracking.
PDT Rule and Options Trading
Options are subject to the same PDT rules as stocks. Each round-trip options trade (buy and sell same day) counts as one day trade. Multi-leg strategies have specific considerations:
- Spreads opened and closed same day: Counts as one day trade per leg, so a vertical spread could count as 2 day trades
- Options assignment: If assigned on an option, subsequent stock sale same day may count as day trade
- Exercise and sell: Exercising an option and selling the stock same day typically counts as one day trade
PDT Rule Myths and Misconceptions
Myth: The rule applies to everyone globally
Fact: The PDT rule is a US regulation. Traders outside the US or using offshore brokers may not be subject to this rule, though other regulations may apply.
Myth: Cash accounts have unlimited day trading
Fact: While the PDT rule does not apply, you are limited by settled funds. Using unsettled funds can trigger good faith violations or free riding violations.
Myth: The $25,000 can include unsettled funds
Fact: Deposits must settle before counting toward the minimum. Same-day deposits may not protect you from a margin call.
How Brokers Track Day Trades
Your broker automatically tracks your day trades using a rolling 5-business-day window. Most trading platforms show:
- Number of day trades used in the current period
- Remaining day trades available
- Your PDT status
- Day trading buying power
Track Your Day Trades Automatically
Pro Trader Dashboard helps you monitor your trading activity and understand your account status. Track all your trades in one place to avoid PDT violations.
History of the PDT Rule
The PDT rule was implemented by FINRA (then NASD) in 2001 following the dot-com bubble. Regulators observed that many inexperienced traders were using margin to day trade during the late 1990s boom, often suffering catastrophic losses when the market crashed. The $25,000 requirement was designed to ensure that day traders had sufficient capital to absorb losses and meet margin calls.
Summary
The Pattern Day Trader rule requires maintaining $25,000 in a margin account if you make 4 or more day trades in 5 business days. While this can be frustrating for smaller accounts, understanding the rule helps you trade within its boundaries or find legitimate alternatives like cash accounts, futures trading, or swing trading strategies.
Key takeaways: Know your day trade count, understand the 5-day rolling window, consider cash accounts or futures if under $25,000, and always check your broker's specific PDT policies. With proper planning, the PDT rule does not have to limit your trading career.
Related reading: Understanding Margin Calls | Regulation T Margin Requirements | FINRA Rules for Traders