What is the Pattern Day Trading Rule?
As a frequent trader, if you make 4 or more day trades in a 5 trading day period, unless your day trading activities are less than 6% of your total trading activity for that time period, you will be labeled a pattern day trader. Traders that are labeled as pattern day traders (PDT’s) are required to maintain at least $25,000 worth of equity in their account on any day they process a day trade.
For newer traders who are unsure, the definition of a day trade is any trade that is opened and closed on the same trading day. As a side note, if you open a position and then use two orders to close the same trade, it only counts as 1 day trade.
Of course, there are ways around this rule. See Ways to Avoid the Pattern Day Trading Rule to sidestep these policies.
Should a pattern day trader exceed the day-trading buying power limitation granted by your broker, the brokerage will issue a day-trading margin call (DT Margin) to the trader’s account. The pattern day trader then has 5 business days to deposit funds to meet this “DT Margin Call.” During this 5 day period, until this margin call is met, the account is restricted to day-trading buying power of only two times maintenance margin. Should the day-trading margin call not be met by the fifth business day, the account is restricted further to trading only on a cash basis (margin account suspension, cash account only) for 90 days or until the call is met.