The Pattern Day Trader (PDT) rule is one of the most important regulations for active traders in the United States. If you want to day trade stocks, you must understand this rule to avoid account restrictions and potential penalties.
What is the Pattern Day Trader Rule?
The PDT rule is a regulation by FINRA (Financial Industry Regulatory Authority) that defines a pattern day trader as anyone who executes 4 or more day trades within 5 business days, provided the number of day trades is more than 6% of total trades in that period.
A day trade is defined as buying and selling (or selling short and buying to cover) the same security on the same day in a margin account.
Key requirement: Pattern day traders must maintain a minimum account equity of $25,000 in their margin account at all times. This can be a combination of cash and eligible securities.
Why Does the PDT Rule Exist?
The PDT rule was implemented in 2001 after the dot-com bubble burst. Many inexperienced traders lost significant money day trading on margin. FINRA created this rule to:
- Protect inexperienced traders from excessive risk
- Ensure day traders have enough capital to absorb losses
- Reduce the risk of margin calls and forced liquidations
- Create a barrier to entry that encourages education before trading
How the PDT Rule Works
The 5-Day Rolling Window
The rule uses a rolling 5-business-day window. If you make 4 or more day trades in any 5-day period, you are flagged as a pattern day trader. This flag typically stays on your account permanently, even if you later trade less frequently.
What Counts as a Day Trade
- Counts: Buy 100 shares of AAPL at 10 AM, sell 100 shares at 2 PM same day
- Counts: Sell short 50 shares of TSLA at 9:30 AM, buy to cover at 11 AM same day
- Does not count: Buy today, sell tomorrow (this is a swing trade)
- Does not count: Multiple buys then one sell - counts as one day trade
Example Scenario
Monday: 1 day trade. Tuesday: 0 day trades. Wednesday: 2 day trades. Thursday: 1 day trade. At this point, you have made 4 day trades in 4 days. If you have less than $25,000 in your account, your broker will flag you as a pattern day trader and restrict your account.
Consequences of Violating the PDT Rule
If you are flagged as a PDT with less than $25,000:
- 90-day restriction: Your account may be limited to closing transactions only
- Margin call: You may receive a day trade margin call requiring you to deposit funds
- Account freeze: Some brokers freeze the account until you deposit $25,000 or wait 90 days
- Liquidation: Brokers may liquidate positions to meet margin requirements
Warning: Each broker handles PDT violations differently. Some are strict, others more lenient. Always check your broker's specific policies.
Legal Ways to Day Trade with Less Than $25,000
1. Use a Cash Account
The PDT rule only applies to margin accounts. With a cash account:
- No minimum balance requirement
- You can day trade freely
- Limitation: Trade settlement takes 1 business day (T+1)
- You can only trade with settled funds
Example: If you have $5,000, you can day trade with that $5,000 today. But you cannot use those same funds again until they settle tomorrow.
2. Stay Under 4 Day Trades
You can make up to 3 day trades in any 5-business-day rolling period without being flagged. Many traders carefully track their day trades to stay under this limit.
3. Trade Futures or Forex
The PDT rule only applies to stocks and options. Futures and forex markets have no PDT restrictions, though they come with their own risks and requirements.
4. Use Multiple Broker Accounts
The PDT rule applies per account. If you have accounts at multiple brokers, you can make 3 day trades at each. However, this requires more capital spread across accounts.
5. Trade with an Offshore Broker
Some traders use non-US brokers that do not enforce PDT rules. However, this comes with significant risks including less regulatory protection, potential tax complications, and counterparty risk.
PDT Rule and Options Trading
The PDT rule applies to options the same as stocks. Buying and selling the same option contract on the same day counts as a day trade.
However, options offer some unique strategies:
- Spreads: Opening a spread and closing both legs the same day counts as one day trade
- Next-day expiration: Buying options that expire tomorrow and holding overnight is not a day trade
How Brokers Handle PDT
Different brokers have different policies:
Strict Brokers
- Immediate account restriction
- Require $25,000 deposit to unlock
- No PDT resets or warnings
- May close positions automatically
Lenient Brokers
- Warnings before restriction
- One-time PDT flag removal
- 90-day unlock option
- More flexible margin calls
Tracking Your Day Trades
Most brokers show your day trade count somewhere in your account. Look for:
- Day trade counter or indicator
- PDT warning messages
- Account status page
If your broker does not clearly show day trade counts, track them yourself. A single mistake can restrict your account for 90 days.
Building Capital to Meet PDT Requirements
If you want to day trade freely, here are strategies to build to $25,000:
- Swing trade: Hold positions overnight to grow capital without PDT restrictions
- Save consistently: Add to your account regularly
- Trade a cash account: Grow your account slowly with settled funds
- Paper trade: Practice without real money until you have sufficient capital
Track Your Day Trades Automatically
Pro Trader Dashboard connects to your broker and tracks all your trades. Know exactly how many day trades you have made and avoid PDT violations.
Summary
The PDT rule requires $25,000 minimum equity to freely day trade in a margin account. If you have less capital, you can use a cash account, stay under 4 day trades per 5 days, or trade markets without PDT restrictions. Understanding and respecting this rule prevents account restrictions that can sideline you for months.
Ready to learn more? Check out our guide on how much money you need to start day trading or learn about day trading basics.