How Many Times Can You Day Trade Under the PDT Rule?

Day trading involves the rapid buying and selling of securities within the same trading day. While offering opportunities for quick gains, this approach also carries considerable risks. For retail investors, specific regulatory guidelines exist, particularly for certain brokerage accounts, to manage the inherent risks of frequent trading.

Defining a Day Trade

A day trade occurs when an investor buys and sells, or sells short and then buys to cover, the same security within the same trading day. This definition applies to various securities, including stocks and options. For example, if an investor purchases 100 shares of a company’s stock at 10:00 AM and then sells those same 100 shares at 2:00 PM on the same day, that transaction counts as one day trade. Similarly, if an investor sells shares short in the morning and buys them back before the market closes, it also constitutes a day trade.

The Pattern Day Trader Rule Explained

The Financial Industry Regulatory Authority (FINRA) established the Pattern Day Trader (PDT) rule, FINRA Rule 4210, to regulate frequent day trading in margin accounts. An individual is classified as a pattern day trader if they execute four or more day trades within any five consecutive business days, and these day trades represent more than six percent of the customer’s total trading activity within that period.

Once designated as a pattern day trader, an account must maintain a minimum equity of $25,000. This equity, which can be cash and eligible securities, must be present in the margin account. If the account’s equity falls below this $25,000 threshold, the pattern day trader is prohibited from further day trades until the account balance is restored. The PDT rule primarily applies to margin accounts, which allow investors to trade with borrowed funds, and does not apply to cash accounts.

Implications of Pattern Day Trader Status

Being classified as a pattern day trader or violating the associated rules can lead to significant restrictions on an investor’s trading activity. If an account’s equity drops below the required $25,000 minimum, the brokerage firm will issue a day trading margin call. The trader typically has five business days to meet this call by depositing additional funds or securities.

While a margin call is outstanding, the account’s day-trading buying power may be restricted. If the call is not met, the account can be limited to trading only on a cash available basis for 90 days. Some brokers may restrict the account to closing existing positions only, preventing new trades. Brokerage firms generally notify traders of their PDT status and any resulting restrictions.

Strategies for Day Trading

Investors can employ several strategies to navigate the Pattern Day Trader rule. One option is to use a cash account instead of a margin account, as PDT rules do not apply. However, trading in a cash account requires careful attention to settlement times. Using unsettled funds to make a purchase and then selling that security before the initial funds settle can result in a “good faith violation,” which can lead to trading restrictions, potentially freezing the account for 90 days after multiple violations.

Another approach involves limiting day trades to stay below the four-trade threshold within the five-business-day period. This strategy allows traders with less than $25,000 in their margin accounts to still engage in some day trading without being flagged as a pattern day trader. For those who wish to day trade frequently, increasing account equity to meet or exceed the $25,000 requirement is a solution. Understanding the rules is essential for any investor engaging in day trading.