All traders and investors should know the pattern day trading rules, such as the required minimum equity, the number of trades you can make, and buying power limitations.
The consequences for violating PDT vary, but can be inconvenient for investors who are not actively trading
For active investors who want to place an occasional day trade, understand how margin and open positions can affect total trade equity to help avoid PDT violations
You’re not normally a rule-breaker. But violating the pattern day trader rule is easier to do than you might suppose, especially during a time of high market volatility. Don’t let this happen to you. Here’s what you need to know.
First, a hypothetical. Suppose you buy several stocks in your margin account. Minutes or hours later, you change your mind about a few of your purchases, so you sell them. Your “round trip” (buy and sell) trades all took place on the same trading day.
If you execute four or more round trips within five business days, you will be flagged as a pattern day trader.
Here’s where you might be dinged: If you’re flagged as a pattern day trader and you have less than $25,000 in your account, you could be restricted from opening new positions.
So, what now? You’re in trouble, but what are the consequences? What if you do it again? More importantly, what should you know to avoid crossing this red line in the future? Keep in mind that you don’t have to borrow on margin to violate the pattern day trader rule. It’s a good idea to be aware of the basics of margin trading and its rules and risks.
There are a few simple but strict rules that define pattern day trading. Let’s go over them.
A day trade is what happens when you open and close a security position on the same day.
Let’s break that down:
You are a pattern day trader if you make four or more day trades (as described above) in a rolling five business day period, and those trades make up more than 6% of your account activity within those five days.
There are different types of day traders but we’ll focus on the following two:
Now what? It depends on your brokerage. For first-time offenders, the consequences might not be so bad, assuming your brokerage has a more forgiving policy. However, you will likely be flagged as a pattern day trader (in the violator sense) just so your broker can watch your activities for any consistent or repeat offenses. So, tread carefully.
If you make four day trades in a rolling five days, some brokerages may subject you to a minimum equity call, meaning you have to deposit enough funds to have a minimum account value of $25,000 (even if you don’t intend to day trade on a regular basis). If you make an additional day trade while flagged, you could be restricted from opening new positions.
This is a big hassle, especially if you had no real intention to day trade. If you violated the pattern day trading rules by accident, or if you were tempted to take some profits (or close out losses) within the same day—enough to get flagged in violation—the hassle just isn’t worth the momentary lapse in caution. But if you inadvertently end up flagged as a day trader and don’t intend to day trade going forward, you can contact your broker who may be able to give you some alternatives to avoid trading restrictions. Regulatory guidance on flag removals is fairly strict and limited. With proper agreements in place, you may have the flag removed from your account one time. As you continue to trade, if your future trading activity constitutes pattern day trading, the pattern day trading flag will be placed back on your account and it cannot be removed.
If you do want to officially day trade and apply for a margin account, your buying power could be up to four times your actual account balance. You could inform your broker (saying “yes, I’m a day trader”) or day trade more than three times in five days and get flagged as a pattern day trader. This allows you to day trade as long as you hold a minimum account value of $25,000, and keep your balance above that minimum at all times.
Check out our wide range of educational resources including articles, videos, an immersive curriculum, webcasts, and in-person events.
Before you do that, be sure you really understand your account balance, as there are many things that can affect your trade equity.
Getting dinged for breaking the pattern day trader rule is no fun. Of course, you if want to be a more active trader, possibly even do a little day trading on occasion, then you might go ahead and brush up on the rules concerning margin. Otherwise, if you can steer clear of violating the rules, or simply keep your account value well over $25,000, you’ll have less to worry about should you need to execute a short-term trade.
To learn more about day trading, watch this video:
for thinkMoney ®
Financial Communications Society 2016
for Ticker Tape
Content Marketing Awards 2016
Content intended for educational/informational purposes only. Not investment advice, or a recommendation of any security, strategy, or account type.
Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade. Clients must consider all relevant risk factors, including their own personal financial situations, before trading.
Margin trading increases risk of loss and includes the possibility of a forced sale if account equity drops below required levels. Margin is not available in all account types. Margin trading privileges subject to TD Ameritrade review and approval. Carefully review the Margin Handbook and Margin Disclosure Document for more details.
The risk of loss on a short sale is potentially unlimited since there is no limit to the price increase of a security. There is no guarantee the brokerage firm can continue to maintain a short position for an unlimited time period. Your position may be closed out by the firm without regard to your profit or loss.
Market volatility, volume, and system availability may delay account access and trade executions.
Past performance of a security or strategy does not guarantee future results or success.
Options are not suitable for all investors as the special risks inherent to options trading may expose investors to potentially rapid and substantial losses. Options trading subject to TD Ameritrade review and approval. Please read Characteristics and Risks of Standardized Options before investing in options.
Supporting documentation for any claims, comparisons, statistics, or other technical data will be supplied upon request.
This is not an offer or solicitation in any jurisdiction where we are not authorized to do business or where such offer or solicitation would be contrary to the local laws and regulations of that jurisdiction, including, but not limited to persons residing in Australia, Canada, Hong Kong, Japan, Saudi Arabia, Singapore, UK, and the countries of the European Union.
TD Ameritrade, Inc., member FINRA/SIPC, a subsidiary of The Charles Schwab Corporation. TD Ameritrade is a trademark jointly owned by TD Ameritrade IP Company, Inc. and The Toronto-Dominion Bank. © 2022 Charles Schwab & Co. Inc. All rights reserved.