Day Trading Rules – What Is The Pattern Day Trader Rule?

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Day Trading Rules – What Is The Pattern Day Trader Rule?
Learn how to avoid this day trading rule at http://daytradervideo.com

This is one of the most asked about day trading rules that I see. I get emails and comments about this all the time. So, I figured I’d tackle this in a video.

What exactly is the pattern day trader rule?

This rule was created by the Securities and Exchange Commission to protect people from losing a lot of money at any given period of time. But that’s not the actual definition of the pattern day trader rule and I’ll give that to you in a minute.

Just understand that it’s another one of those rules that our government has enforced to protect us from doing something really crazy like blowing up several accounts. Now while I don’t agree with it and most of you probably won’t agree with it either. After all this is a free country isn’t it?

The bottom line is that if you plan on being a day trader and trading anything other than futures and forex then you are going to have to follow this and many other day trading rules. Your brokerage will have systems in place to prevent you from making any more than the allowed number of trades within 5 day time period.

So, now let’s talk more about the specifics of this day trading rule.

A pattern day trader is described as someone who buys and sells any security for four or more times in any five consecutive business days. The main rule to understand is that in order to avoid this altogether you must maintain an equity balance of at least $25k.

This amount has to be in your trading account or else you’ll be subject to this rule. As you can imagine this can make it extremely hard for anyone who is trying to start out learning to trade stocks or any security for that matter.

You’re either going to need to have a good chunk of change stashed or you’re going to have to make less than the 4 roundtrip trades per any 5 day period. I can tell you from experience that it wasn’t easy for me and that’s why eventually as I loved to take many trades. So, I had to initially fund my account with more than 25k and eventually I just moved over to futures that doesn’t have the same requirements.

Comments

Nathan Daniels says:

I’m totally confused by this, as I get different answers. Those that
should know the most about this, will often state that you can day trade as
much as you want without this $25k requirement if you don’t use a margin
account, if you use a regular cash account and always has the available
funds to pay for each stock you purchase. The margin trading has these
rules only, as it’s more risky trading and they need to make sure the
trades are paid for. However margin trading or a margin account isn’t
required. This was explained to me by the larger brokerage firms.. I’m
hoping their right, otherwise I don’t know whom to ask for the right
answer..

I wish the SEC and FINRA would clarify this so it’s more clear if these
apply to margin accounts only and/or if a cash account is okay for day
trading (pattern or not). The internet gives so much conflicting
information in regards to this, as this distinction between cash only and
margin accounts isn’t clarified in regards to day trading.

almanacaa says:

Not Defined for Cash Accounts

The Pattern Day Trading rule regulates the use of margin and is defined
only for margin accounts. Cash accounts can not use margin, so there is no
way to further restrict their use of margin, so there is no rule to
classify them as engaging in Pattern Day Trading. They may still engage in
day trading, even at a frequency that would classify a margin account as
engaging in Pattern Day Trading, as long as this does not result in free
riding, the selling of securities bought with unsettled funds before the
funds have settled. Any instance of free-riding will cause a cash or margin
account to be restricted for 90 days from purchasing securities with
unsettled funds.

midi002 says:

Lets assume we have a full week and $4000.

I buy and sell 1 stock on Monday. (I make $100)
I buy and sell 1 stock on Tuesday. (I make $100)
I buy and sell 1 stock on Wednesday. (I make $100)
I buy and sell 1 stock on Thursday. (I make $100)
If I buy and sell 1 stock on Friday, will I violate the rule?

Tgastt Batangueno says:

Hi, I was barred by my brokerage house for this rule, because I don’t have
a $25,000.00 in my account. I just trade 10 shares of volatile stock and I
only take 2 or 3 points loss on my position. I talked to them about it and
they said it don’t matter how many shares I traded. So, they put me back
on cash account and I have to waite for several days to be able to trade
again. This is suck!

MrMaier3000 says:

Can you day trade option under $25k?

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