How Many Trades Per Day Before Being a Pattern Trader?

A “trade” in securities refers to the execution of an order to buy or sell a financial instrument, such as a stock, bond, or option. This action facilitates the transfer of ownership between parties in the market. The frequency of buying and selling influences an investor’s classification by regulatory bodies and brokerage firms. Understanding these implications is important for market participants.

Understanding Day Trading Activity

A “day trade” specifically involves buying and then selling, or selling short and then buying to cover, the same security within the same trading day. This means the position is opened and closed before the market officially closes for the day. For instance, if an investor purchases shares of a company at 10:00 AM and sells those same shares at 2:00 PM on the same day, that constitutes one day trade.

“Day trading” is the practice of repeatedly executing such transactions, often with the goal of profiting from small, short-term price fluctuations. This activity typically occurs within a margin account, allowing investors to borrow funds to increase purchasing power.

The Pattern Day Trader Rule

The Financial Industry Regulatory Authority (FINRA) established specific guidelines to identify individuals engaging in frequent day trading through its Pattern Day Trader (PDT) rule, FINRA Rule 4210. Under this rule, an investor is designated as a pattern day trader if they execute four or more day trades within a rolling period of five business days. This designation applies only if the number of day trades represents more than six percent of the customer’s total trading activity within that same five-business-day timeframe.

Once an account is flagged as a pattern day trader, the designation generally remains, even if the individual reduces their day trading activity. Brokerage firms also have the discretion to classify an account as a pattern day trader if they have a reasonable belief that the customer intends to engage in such frequent trading, potentially based on prior training or observed trading behavior.

Account Requirements for Pattern Day Traders

For accounts designated as pattern day traders, specific equity requirements must be met to continue day trading. A minimum equity of $25,000 must be maintained in the margin account at all times on any day the customer engages in day trading. This required amount can be a combination of cash and eligible securities. The $25,000 must be present in the account before any day trading activities begin.

If the account’s equity falls below this $25,000 minimum, the pattern day trader is prohibited from executing further day trades. Trading can only resume once the account is restored to or above the required $25,000 level.

What Happens When You Exceed the Limit

Failing to meet the equity requirements as a designated pattern day trader can lead to significant trading restrictions. If a pattern day trader’s account equity falls below the $25,000 minimum, or if they exceed their day-trading buying power, the brokerage firm will issue a day-trading margin call.

The trader typically has up to five business days to deposit additional funds or eligible securities to meet this call. Until the margin call is satisfied, the account’s day-trading buying power becomes restricted, often reduced to a lower multiple of the account’s maintenance margin excess.

If the day-trading margin call is not met within the five-business-day period, the account may be further restricted. This can include being limited to trading only on a cash available basis for 90 days, or until the call is fully met.