What is the Pattern Day Trader Rule?
A pattern day trader is defined as a frequent trader, making 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. Therefore, understanding the pattern day trader rule (or PDT rule) is very important. Traders that are labeled as a pattern day trader (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. Additionally, don’t let the above graphic fool you. A new week (Monday morning) means nothing when it comes to the pattern day trader rule. It’s a running 5 day count, not a Monday through Friday count. Of course, there are ways around this rule. See ways to avoid this rule, and sidestep these policies.
DT Margin Call
Should a pattern day trader exceed the day-trading buying power that is granted by your broker, the brokerage will issue a day-trading margin call (DT Margin) to the trader’s account, as they have violated the pattern day trader rule. 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.