Pattern Day Trader (PDT) Rules – Everything You Need to Know

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If you are a Pattern Day Trader, you are a trader or investor that executes more than 3 round trip trades (buying and selling the same stock) in a 5 day period.  Many active day traders will trade as many as 20-30 times in a single day.

This means his or her broker will designate the account as a Pattern Day Trader.  The biggest issue with being flagged as a Pattern Day Trader is that you must maintain an account balance of $25,000.00USD.



According the the SEC, this is the simple explanation.

FINRA rules define a “pattern day trader” as any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period.  This rule represents a minimum requirement, and some broker-dealers use a slightly broader definition in determining whether a customer qualifies as a “pattern day trader.”  Customers should contact their brokerage firms to determine whether their trading activities will cause them to be designated as pattern day traders.

A broker-dealer may also designate a customer as a “pattern day trader” if it “knows or has a reasonable basis to believe” that a customer will engage in pattern day trading.  For example, if a customer’s broker-dealer provided day trading training to such customer before opening the account, the broker-dealer could designate that customer as a “pattern day trader.”

Under FINRA rules, customers who are deemed “pattern day traders” must have at least $25,000 in their accounts and can only trade in margin accounts.  For more information on pattern day traders and related FINRA margin rules, please read the SEC staff’s investor bulletin “Margin Rules for Day Trading.”

But here is the caveat, the SEC bases the ruling on intent of the buyer, so this leaves a little wiggle room as stated in the line [some broker-dealers use a slightly broader definition], basically its simple if you’re not very active i.e you swing trade or invest and during the intra day you don’t scale in or scale out of a position to bank profits, you are allowed to buy and sell the same stock or option during the same day 3 times in a five day period.

If you are a bit more active or in a potentially volatile position with profits unrealized or worse yet compounding losses. You just have to get out. Then read-on.

A round trip (RT) or day trade is defined but a buy and sell in the same day, so buy any equity from 7:00 am to 8:00 pm and sell the next day from 7:00 am on and you are fine, no day trade.

And generally most interpretations are the lesser side of the trade is the count of the trips, in other words you buy 900 shares of XYZ at 9:45am, then same day you sell 300, later 300 and end of day 300 this counts as one roundtrip as well as if you buy 300 shares of xyx at 10am 300 at 11am and 300 at noon then sell end of day all 900 shares again one roundtrip, and you can do this three times in a rolling 5 day period.

Simple enough so why all the confusion?

If you buy 300 shares of XYZ at 10am and 300 at 11am then sell 100 at noon and the rest or any amount in the same day this is 2 round trips (2 day trades) and a little more confusion let say you purchase 300 shares of XYZ at the end of the day and the next morning it spikes and you buy 300 additional shares then you sell 300 shares that after noon that is your first day trade even though you have owned those shares from the previous day, once you add the same equities to your portfolio it treats it as if you purchased ALL of them in the same day !

To avoid this extra roundtrip, because this scenario is where most people get flagged, you would need to sell the shares you owned from yesterday and then buy additional to avoid the day trade flag.



BOTTOM LINE understand your brokers rules and keep very good journals if you are doing this. Some brokers will keep track for you and warn you even while you are placing trades. Others will not.

This is the regulation, but again be sure to confer with your broker so you are 100% clear in the potential of their “slightly broader definition”, because they are all not created equal, Etrade for example doesn’t care about closing positions or the intent, they look at only your opening position purchases, i.e. buy 500 shares of XYZ two times and then sell all 1000 they will hit you with two roundtrips. But buy 1000 and scale out three times until you are flat and it counts as one day trade.

The workarounds: get your account level to $25,000 and no worries, or use an offshore brokerage house like SureTrader, no worries, or have multiple not-like accounts or multiple accounts at different brokers, this rule pertains to each different type of account you trade. i.e. you can own an individual account, an IRA account and a joint account and are able to have 3 roundtrips for each account.

However; Please be aware then of tax settlement guidelines and margin capabilities of those accounts… and lastly if you get flagged and it is your first offense in that broker, they will most likely excuse you for a one-time mulligan.

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