What Is The Pattern Day Trader (PDT) Rule?
This rule regulates day trading. Hence, it sets the number of day trades an investor can make. When a trader hits the limit, a broker flags the account as a pattern day trader.
Pattern day trader rules discourage investors from buying or selling the same securities excessively. Investors who hit the limit get more scrutiny and regulation. For example, their margin accounts should hold $25,000.
If this balance drops, they can’t trade again during that day until they replenish the balance. Having such an amount in your account is beneficial as it’ll give you more buying power.
Hence, from the $25,000, you’ll have $100,000 for day trading as the buying power is four times.
What Is Pattern Day Trader?
It’s an investor who makes four or more day trades over five business days. As such, an investor buys, shorts, or sells the same security. These day trades must be over 6% of the total trades made from your margin account in those five days.
History Of The Pattern Day Trader Rule
The pattern day trade rule started in February 2001 when the Securities and Exchange Commission (SEC) and FINRA set it on all securities, even options. Although investors may change their trading patterns after the PDT rule applies, they’ll still feature as PDTs because of their trading history.
Example Of The Pattern Day Trader Rule
Henry buys XXX stocks on Monday and sells them the same day. He also buys ZZZ stocks and sells them before the end of the day. The following day, he buys YYY stocks and sells them the same day.
On Wednesday, Henry short-sells ZZZ stocks. Later, he buys XXX stocks and sells them. Thursday, he trades XXX stocks. So, what is pattern day trader rule? By Wednesday, Henry already has more than four-day trades, so the PDT rule applies to his account.