Pattern Day Trader is a FINRA designation for participants in the stock market. The regulatory body differentiates frequent trading activities by professionals apart from those whom participate as a hobby. This designation protects unsophisticated investors from themselves. Furthermore, it ensures the integrity of trading, separating it from gambling.
Pattern Day Trader Defined
This rule applies to any trader who buys and sells a security in the same trading day, and does this four or more times in any five consecutive business day period. Furthermore, this rule applies to margin, not cash accounts. This rule is both long and confusing, so let’s break it down.
This rule applies to those who execute four or more round-trip day trades within any five consecutive business days. A round trip is opening and closing a position within the same day.
Restrictions On Violations
Next, what happens if one exceeds their trading limit? First, the violating party will only be allowed to close positions or purchase with available cash for the next 90 days. Also, he can deposit $25,000 into the account. Whichever happens first relieves the account of the restriction.
Requirements Of Pattern Day Traders
Thresholds exist to ensure that traders are sophisticated and have a large enough grubstake to remain solvent. The Securities and Exchange Commission (SEC) believes day trading is inherently more risky than long term investors. A pattern day trader’s account must remain above $25,000 each day. Furthermore, these traders must deposit funds within 5 days in order to meet a margin call.
Additionally, having the pattern day trading designation allows traders to use margin, which is the ability to establish positions larger than the trader’s account. Usually margin gets as high as 4:1. If a trader has $30,000 account, he can trade as if it were a $120,000 account.
Finally, the pattern day trader designation allows professionals to operate their business efficiently, and ensures novices have risk controls. Additionally, different brokers typically give different margin, depending if positions are flat overnight or not. Make sure to find the right broker that fits a specific trading style.