Pattern Day Trading Rule

The PDT Rule, or Pattern Day Trading Rule, is a regulation established by the Financial Industry Regulatory Authority (FINRA) that defines the criteria for being classified as a pattern day trader in the United States.

Definition of the PDT Rule

The PDT Rule stipulates that a trader is classified as a pattern day trader if they execute four or more day trades within a rolling five-business-day period in a margin account. This classification requires that the trader maintains a minimum equity balance of $25,000 in their trading account.

Key Components of the PDT Rule

• Day Trade: A day trade occurs when a trader buys and sells (or sells and buys) the same security within the same trading day.
• Margin Account: A margin account is a type of brokerage account that allows investors to borrow money from the broker to purchase securities.
• Minimum Equity Requirement: To be classified as a pattern day trader, an account must have at least $25,000 in equity at all times.

Consequences of the PDT Rule

• If a trader is classified as a pattern day trader and their account falls below the $25,000 threshold, they may be restricted from making additional day trades.
• Pattern day traders are subject to specific regulatory requirements, including the need to follow the $25,000 minimum balance rule.
• Failure to comply with the PDT Rule can result in the account being converted to a cash account, which limits the ability to day trade.

Overall, understanding the PDT Rule is crucial for active traders, as failing to comply can significantly limit trading activities and strategies.