Pattern Day Trader Rule Explained

Pattern Day Trader Rule

The Pattern Day Trader rule requires that you have at least $25,000 in your trading account if you are day trading.

The tricky part is that you could trigger this rule even if you're only swing trading,

So in this video, I'll show you what the pattern day trader rule is, how you can trigger it, even if it's accidentally, what happens when you trigger it, and how you can avoid it.

So what is the pattern day trader rule? Now, according to FINRA, who set the rule, a pattern day trader is a trader if you execute 4 or more day trades in 5 trading days.

If you execute 4 or more day trades in 5 trading days, then you're being flagged as a pattern day trader.

So a day trade is a trade that you open and close during a trading day.

Now, very, very important: this whole rule only applies to stocks and options. So it does not apply to futures, forex, or to binary options.

Let's say that we enter a trade tomorrow and it hits the profit target or stop loss on the same day. This would be another strike, because now we are also entering and exiting during a trading day.

Well, what happens when you trigger this rule?

If you have more than $25,000 in your account, nothing, because it doesn't matter, because according to the pattern day trader rule if you are a pattern day trader, then you need to have $25,000 in your account.

Now if you don't, then you will be restricted to trade on a cash basis only for 90 days.

See, as a day trader, you need a margin account, and when you trigger the pattern day trader rule and cannot put $25,000 in there, this means that now you are restricted to trading with cash only.

So let's say you put $20,000 in an account, and this means if you put it into a margin account, that you get $40,000 in buying power.

So when you trigger the day trading pattern rule, you no longer get this buying power here, the 2:1 leverage. You are now basically going back to whatever cash you put in there.

How can you avoid this?
1) Have $25,000 in your account. So if you have $25,000 in account, then no worries.
2) You can avoid it here by trading a cash account. If you're not trading a margin account, you don't have to worry.
3) If you are trading futures, forex, bitcoins, so cryptocurrencies, or if you are trading binary options, this is also when the day trading pattern rule does not really matter.

Links and videos in this episode:
Wheel Playlist:

#PatternDayTraderRule #PatternDayTrader #DayTradingRuleExplained
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[rockwelltradingservices]

Did this clear up the Pattern Day Trader Rule for you? What other topics would you like to see me do a video on? Let me know down in the comments below.

Links and videos in this episode:
Wheel Playlist:

[KpxUrz]

Yes this was helpful. A better explanation than I have seen in other videos. Thanks.

[desidac]

Great short video on an important subject for someone who is trading daily. I did not know about this rule and because of your informative video I do. Thanks Markus! Des

[belaghoulashi]

Good explanation, good stuff. I've subscribed.

[tvs]

Good, I finally learned what pattern day trading rule is for. I have accounts at eTrade, TD Ameri, Robinhood (soon to be closed) so I was up against it in one of these.

[raghavannatarajan]

Thank you Mr.Markus. This was really helpful.

[JohnSmith-xmzz]

ok so Persuant to your words in your video (words have specific meaning and are precise), a Day Trade is a trade placed from open bell to Close (9:00am-4:00pm). Pre market and post market don't count. Great Thank You for telling me this. You say this rule only applies to Stocks & Options, so it doesn't apply to EFT's at all ever. Great! Thanks for clearing this up for me.

[showandshare]

It's about time we get rid of the PDT rule. We're not babies, we can make our own decision. Time to let poor people day trade too.

[vevasam]

Thanks Markus. As always it was very helpful :)

[luismanuelmendoza]

Look, I took this from IBKR “We have created algorithms to prevent small accounts from being flagged as day trading accounts, to avoid triggering the 90 day freeze. We implement this by prohibiting the 4th opening transaction within 5 days if the account has less than 25, 000 USD in equity.” It wont let you make the 4th daytrade so you dont get flagged!

[Vugr]

So it gets resetted after 5 days right?

[GurlalDhillon]

when they say have 25k is that cash just sitting there or it can be stocks worth 25k?

[Gardening]

Good video I have a question $25, 000 in cash account or In margin account? Thank you

[spmirhs]

What if I WANT to day trade and have less than 25, 000. Is it okay to be flagged as a pattern day trader and continue trading with 10k? Is the only limitations that you lose the ability of margin?

[brianking]

What if your a cash only account to start with, you do not have a margin account. Does the PDT rule apply ?

[travel_passion]

If I maintain minimum 25000 in my margin account after buying all stocks in a day then still 4 day rule will applicable ?

[bharani]

Pdt rule is applicable for ES mini options?!!

[mitchell]

Does the $25, 000 have to be in your individual account or does that count your options that you executed as well?

[PederE]

Why are there Pattern Day Trader Rules?
Who or what are they trying to protect?

[tshepolesufi]

Guys I am new to trading I have a question I trade volatility index and I trade multiple times a day not as a scalper so does PDT apply to also volatility indexes not sure if vix is forex or options