When Does Pattern Day Trading Reset?
Understand the dynamic nature of the Pattern Day Trader rule, how trading frequency impacts account status, and effective management.
Day trading involves the frequent buying and selling of securities within the same trading day, aiming to profit from short-term price movements. This active trading strategy is subject to specific regulations, particularly for those utilizing margin accounts. Understanding the Pattern Day Trader (PDT) designation is important for individuals engaging in such activities.
Understanding the Pattern Day Trader Rule
The Financial Industry Regulatory Authority (FINRA) established the Pattern Day Trader rule to oversee frequent trading in margin accounts. A “day trade” is defined as the purchase and sale, or the sale and purchase, of the same security on the same day within a margin account. This definition applies to various securities, including stocks and options. The rule specifically targets margin accounts, which allow traders to borrow funds from their brokerage firm to increase their buying power.
Individuals designated as pattern day traders must maintain a minimum equity of $25,000 in their margin account. This equity, which can consist of cash and eligible securities, must be present before any day-trading activities commence. If the account balance falls below this $25,000 threshold, the pattern day trader will be restricted from engaging in further day trades until the account is restored to the minimum equity level.
Triggering Pattern Day Trader Status
An individual becomes designated as a Pattern Day Trader if they execute four or more day trades within any five consecutive business days. However, these day trades must also represent more than six percent of the customer’s total trading activity during that same five-business-day period. This means a high volume of overall trades with a small proportion of day trades may not trigger the status.
The five-business-day look-back period is a continuous, “rolling” window, not fixed to a calendar week. Each new business day, the oldest day of the five-day window falls off, and the new day is added, constantly re-evaluating the trading activity.
If a trader completes three day trades within the five-day window, a fourth day trade within that same period would trigger the PDT designation, assuming it also meets the 6% activity threshold. Brokerage firms provide tools or warnings to help traders monitor their day trade count within this rolling period.
Managing a Pattern Day Trader Flag
If a pattern day trader’s account equity drops below the $25,000 minimum, they receive a day-trading margin call. The trader has up to five business days to deposit additional funds or eligible securities to meet this call and restore their account to the required equity level.
Failure to meet a day-trading margin call within the specified timeframe can lead to significant restrictions. The account may be limited to trading only on a cash available basis for 90 days, or until the call is met. During this 90-day restriction period, the trader can only close out existing positions and is prohibited from initiating new day trades.
Some brokerage firms offer a one-time “reset” of the PDT flag, within a 180-day period. This “reset” allows the trader to remove the PDT designation and resume normal margin trading activity, provided they meet specific criteria set by the brokerage. The availability and exact terms of such a reset can vary between different brokerage firms.
Preventing Future Pattern Day Trader Flags
Traders can implement several strategies to avoid triggering or re-triggering the Pattern Day Trader status. Regularly monitoring the day trade count is a practical approach, as many brokerage platforms offer tools to track day trades within the rolling five-business-day period. This allows traders to adjust their activity before reaching the threshold.
Maintaining account equity well above the $25,000 minimum is another effective preventative measure. A higher equity cushion reduces the risk of falling below the threshold due to market fluctuations or trading losses. For traders with limited capital or those who frequently execute day trades, considering a cash account can be an alternative. While cash accounts have different settlement rules, they are not subject to the PDT rule’s $25,000 minimum equity requirement.