Pattern Day Trader
Quick Definition
A trader who executes four or more day trades within five business days in a margin account, triggering a $25,000 minimum equity requirement.
Key Takeaways
- Triggered by 4+ day trades in 5 business days in a margin account
- Requires maintaining minimum equity of $25,000 at all times
- FINRA rule designed to protect retail traders from excessive day trading risk
- Only applies to margin accounts — cash accounts are exempt
- Account is restricted from day trading if equity falls below the minimum
What Is Pattern Day Trader?
A pattern day trader (PDT) is a designation applied by FINRA to any margin account holder who executes four or more day trades (buying and selling the same security on the same day) within a rolling five-business-day period, provided those day trades represent more than 6% of total trading activity. Once flagged as a PDT, the account must maintain a minimum equity of $25,000 at all times. If the equity falls below this threshold, the account is restricted from further day trading until the minimum is restored. The PDT rule was implemented to protect inexperienced retail traders from the high risks associated with frequent day trading. The rule applies only to margin accounts — cash accounts can day trade without the PDT restriction, though they are subject to settlement requirements.
Pattern Day Trader Example
- 1A new trader's margin account was flagged as a pattern day trader after making five round-trip trades in three days, requiring $25,000 in equity to continue day trading.
- 2To avoid the PDT restriction, some traders use a cash account instead of a margin account, waiting for trades to settle before reusing the funds.
Related Terms
FINRA
A self-regulatory organization that oversees broker-dealers and their registered representatives in the United States.
Day Trading
Buying and selling securities within the same trading day to profit from short-term price movements.
SEC (Securities and Exchange Commission)
The primary U.S. federal agency responsible for regulating securities markets, protecting investors, and enforcing federal securities laws.
FDIC
Independent federal agency that insures bank deposits up to $250,000 per depositor, per institution, and supervises financial institutions for safety and soundness.
Insider Trading
The illegal practice of trading securities based on material, non-public information obtained through a position of trust or confidence.
Fiduciary Duty
A legal obligation to act in the best interest of another party, placing their interests above one's own.
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