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What is a Pattern Day Trader?
Pattern day trader rule (PDT) is a rule for traders who execute more than four-day trades within five business days with a margin account. The broker will flag the account as a PDT if this happens. In addition, to discourage excessive trading, the PDT rule places restrictions on future trading.
What is a day trade?
Day trade stands for when you open and close a security position on the same day.
Let’s take a look at it:
- Open and close (round trip). It means buying and selling or, if you are a short seller, selling (shortly) and then buying. It is also known as a “round trip.”
- Security position. You can use day trading for virtually all securities, including stocks, bonds, options, calls and puts.
- Same day. It’s a day trade if you make a round trip the same day. It’s not considered a day trade if you keep your security position open beyond the trading day’s closing.
What is a Pattern Day Trader?
You are considered a pattern trader if you make more than four-day trades per day (as described above). These trades account for more than 6% of your account activity over the five days.
Day traders come in many forms, but here are two of our favorites:
- Self-identified day trader. It includes people who have self-identified as day traders.
- Pattern day trading violators. These are those who day trade violate the rules and do not have sufficient capital.
I violated the Pattern Day Trader Rules. What are the consequences?
What now? It all depends on your broker. Some brokers might not punish first-time offenders but will likely flag you as a pattern trader (in a violation sense) so that they can monitor your activities for future offenses.
Some brokerages will require you to meet a $25,000 minimum account balance. In addition, you may be prohibited from opening any new positions if you’re flagged for a period of time.
It’s not fun to get tripped up for violating the pattern day trader rules. You can be more active and even day trade occasionally, but you should learn the margin rules. So either you avoid violating the rules or keep your account balance above $25,000.