How to Avoid Being Marked as a Pattern Day Trader

The Financial Industry Regulatory Authority (FINRA) established rules for day trading. These regulations define what constitutes a “Pattern Day Trader” (PDT) and impose specific requirements. Understanding these rules helps traders avoid restrictions that could impact their activities. The primary goal of these rules is to manage risk within the market, particularly for accounts that use borrowed funds for trading.

Defining a Pattern Day Trader

FINRA rules classify an individual as a Pattern Day Trader based on specific criteria involving day trades in a margin account. A “day trade” is defined as the purchase and sale, or the sale and purchase, of the same security within the same trading day. This applies to various securities, including options, and covers both long and short positions. The count of day trades is maintained over a rolling five-business-day period.

An individual is designated a Pattern Day Trader if they execute four or more day trades within any five consecutive business days. This designation also applies if the number of day trades represents more than 6% of their total trades in a margin account during that same five-day period. A minimum equity of $25,000 must be present in a margin account before any day trading activities begin. If the account equity falls below this $25,000 threshold, the pattern day trader is prohibited from day trading until the account is restored to the minimum level.

Strategies for Avoiding PDT Status

Maintaining sufficient account equity helps avoid the Pattern Day Trader designation. Traders should keep their account balance above the $25,000 threshold required for day trading in a margin account. This ensures continuous access to day trading privileges without triggering restrictions. The $25,000 minimum helps absorb potential losses and manage risk associated with frequent trading.

Traders can limit their day trades to three or fewer within any rolling five-business-day period. This strategy prevents triggering the “four day trades in five business days” rule. Many brokerage platforms offer tools that track day trade counts, allowing traders to manage their activity effectively. By adhering to this limit, even accounts below $25,000 can engage in some day trading without being flagged.

Utilizing a cash account rather than a margin account offers another path to circumvent Pattern Day Trader rules. In a cash account, traders can make an unlimited number of day trades as long as they use fully settled funds for each transaction. However, funds from a sale generally take one business day to settle (T+1) before they can be reused for new purchases. Attempting to buy and sell a security using unsettled funds in a cash account can lead to a “good faith violation.” Accumulating multiple good faith violations can result in account restrictions, such as being limited to buying securities only with settled cash for a period, often 90 days.

Trading alternative financial instruments can also bypass the Pattern Day Trader rule. Futures contracts, for instance, are not subject to FINRA’s PDT rules. This allows traders to execute numerous intraday trades in futures without the same restrictions that apply to equity day trading in a margin account. These instruments operate under different regulatory frameworks and capital requirements.

Managing Your Account After a PDT Designation

If an account is designated as a Pattern Day Trader and falls below the $25,000 equity requirement, the account will face a restriction, limiting it to closing transactions only. This means the trader can sell existing positions to close them but cannot open new positions. This restriction remains in effect until the equity maintenance call is met.

There are methods to lift this restriction. One way is to deposit additional funds into the account to bring its equity back above the $25,000 threshold. These funds must be deposited and settled before any further day trading activity can resume. Alternatively, if funds are not deposited, the account will remain restricted for a period, often 90 days. During this 90-day period, the account is permitted only to close existing positions.

Some brokerage firms offer a one-time “reset” or “waiver” of the Pattern Day Trader status. This option can remove the restriction and allow day trading to resume without waiting the full 90 days or immediately depositing funds. This is a limited option, available only once per account. While FINRA establishes the core rules, individual brokerage firms may implement different internal policies regarding the enforcement and resolution of PDT designations. Traders should consult their specific broker for details on their procedures and available options.