If you buy and sell a security in the same trading day four or more times in any five consecutive business day period using a margin account, and the day trades represent more than six percent of your account activity, your account will be marked as a pattern day trader (PDT) for 90 calendar days.
Your brokerage may have a broader definition in determining whether or not you qualify as a “pattern day trader”. Read your brokerage rules on PDT before you are designated a pattern day trader. You can also learn how to open your online brokerage investment account.
Financial Industry Regulatory Authority (FINRA) define a day trade as:
- The purchasing and selling or the selling and purchasing of the same security on the same day in a margin account including options, and selling short.
- You are using a cash account.
- Equity balance of at least $25,000 (margin account).
- The long or short position is held overnight and sold the next day prior to any new purchase of the same security.
In a cash account, you can buy and sell without the PDT rule since you do not borrow using margin, so day trading is subject to separate rules. But be aware that your cash will have to settle, usually 2-3 days depending on your brokerage, before you can make another trade with the same money. You will need to be aware of free-riding while using your cash account. The violation will result in a 90 days freeze on your account under Regulation T.
An important note to remember is that your margin account must also be at $25,000 or more total in cash and/or securities at the start of trading for that day. If you are using a margin account and it falls below $25,000, the minimum amount must be restored by a cash deposit or other marginable equities before you can resume day trading. You could be limited to only closing out your positions during that time. You can also wait for the 90 days to remove the day trader restrictions that have been imposed on your account.
In simple terms, what is a day trade? A day trade is when buy and sell the same stock or options contract on the same trading day. To make it a little more confusing, the rule is a five-trading-day period, not calendar week. For example, if you trade on Thursday, then your five-trading-day period would be Thursday thru the following Wednesday. Usually, your broker will notify you or most now have a day trade counter available to help you avoid breaking the PDT rule.
Some active traders open several brokerage accounts to avoid the PDT rule. Now with free trades at most brokerages, it makes it easier than ever to do this. You could open an account at Charles Schwab, TD Ameritrade, Fidelity, Robinhood, Webull, and even E-Trade giving you three additional day trades with each account. Also, be aware that most online brokers have a minimum balance, most at least $2,000 before you will have margin availability.
Before day trading you need to be aware that over 80% of day traders are not successful. Have a working strategy in place and manage your risk or you will be a part of the 80%.