How Many Day Trades Can You Make in a Week?

Understanding Day Trades and Pattern Day Traders

A “day trade” refers to the purchase and sale, or the sale and purchase, of the same security within the same trading day in a margin account. This definition applies to any security, including options. For example, buying 100 shares of a stock at 10 a.m. and selling those same 100 shares at 1 p.m. on the same day constitutes a day trade. Selling short and then buying to cover that same position within the same day is also considered a day trade.

An individual is classified as a “Pattern Day Trader” by the Financial Industry Regulatory Authority (FINRA) if they execute four or more day trades within any five consecutive business days. This classification applies if day trades represent more than six percent of the total trades in the margin account during that period. Brokerage firms designate a customer as a pattern day trader if they have a reasonable basis to believe the customer will engage in such trading.

The Pattern Day Trader Rule Explained

The Pattern Day Trader (PDT) rule mandates a minimum equity balance of $25,000 in a margin account for a pattern day trader to continue day trading. This $25,000, which can be a combination of cash and eligible securities, must be present in the account before engaging in any day-trading activities. If the account falls below this minimum requirement, the individual will not be permitted to day trade until the account is restored to the $25,000 level. Funds deposited to meet this requirement must remain in the account for two business days.

The “four day trades in five business days” rule operates on a rolling five-business-day period. This means that each trading day, the brokerage reviews the previous five business days to determine if the criteria for a pattern day trader have been met. For instance, if a trader makes two day trades on Monday and two more on Tuesday, they would be flagged as a pattern day trader. This designation is generally permanent once triggered, though some brokers may offer a one-time removal.

Pattern day traders are also limited in their trading power, generally up to four times the maintenance margin excess from the previous day’s close. Exceeding this day-trading buying power can lead to a day trade margin call.

Implications of Pattern Day Trader Classification

Classification as a Pattern Day Trader carries specific consequences, particularly if the account equity falls below the $25,000 minimum. If an account drops below this threshold, the individual will be restricted from further day trading until the balance is restored. This restriction means the trader can only liquidate existing positions and cannot open new day trades.

Should a pattern day trader exceed their day-trading buying power, a day trade margin call will be issued by the brokerage firm. The trader typically has five business days to meet this call by depositing additional cash or marginable securities. Failure to meet a day trade margin call within this period can result in the account being restricted to trading only on a cash available basis for 90 days, or until the call is met. Repeated violations or unmet margin calls can lead to further restrictions, including account suspension by the brokerage firm.

Trading Without Pattern Day Trader Restrictions

Traders aiming to avoid the Pattern Day Trader classification or its associated restrictions have several alternative approaches. One common strategy involves utilizing a cash account instead of a margin account. The PDT rule does not apply to cash accounts because trades are settled with the trader’s own funds, eliminating the use of borrowed money. However, a significant consideration for cash accounts is the settlement period, which is typically two business days (T+2) for equities, meaning funds from a sale are not immediately available for a new purchase.

Another alternative is to trade securities not subject to the PDT rule, such as futures contracts, forex (foreign exchange), or cryptocurrencies. These markets operate under different regulatory frameworks. For example, the Commodity Futures Trading Commission (CFTC) regulates futures markets, including those based on cryptocurrencies classified as commodities. While these alternatives offer flexibility, they each carry their own distinct risks and regulatory considerations, and the regulatory landscape for cryptocurrencies, in particular, is still evolving. Maintaining an account balance consistently above the $25,000 threshold in a margin account also allows for unrestricted day trading.