Learn Everything About The PDT Rule Here
Here's The Rundown Of PDT Rule:
Simple Definition: The Pattern Day Trader (PDT) Rule requires any margin account identified as a “Pattern Day Trader” to maintain a minimum of $25,000 in account equity, in order to day trade. The Financial Industry Regulatory Authority (FINRA) defines a “Pattern Day Trader” as a brokerage customer that executes more than three round trip trades during a rolling five-business day period. Different brokerages may also implement additional requirements for customers.

Pattern Day Trader is a designation from the Securities and Exchange Commission (SEC) that is given to traders who make four or more day trades in their margin account over a five business day period. A day trade is when you purchase or short a security and then sell or cover the same security in the same day.
Why does the PDT Rule exist?
The Pattern Day Trading rule was implemented back in 2001 as a safety feature to help reduce the risk associated with day trading as the previous rules were deemed insufficient.

Day trading became what some would call “mainstream” in the later part of the 1990s and was popular by 1999-2000. The heavy base of technology in the Nasdaq Index skyrocketed through 5,000 by March 2000 fueled by day traders, overvalued initial public offerings (IPOs) and short squeezes. The NASDAQ price/earnings (P/E) ratio grew to 200. Ultimately, the bubble burst in mid-2000, as the Nasdaq collapsed 78% from its highs. Retail traders with hopes and aspirations of quitting their day jobs to become full-time traders fell back to earth when the bubble popped.

The extreme losses suffered by retail day traders prompted the Securities and Exchange Commission (SEC) to implement new rules in an attempt to “protect” unsophisticated retail traders from repeating the same mistakes. The SEC collaborated with the NYSE and NASD to determine a “Pattern Day Trader”, as one who executes four or more round trips in a rolling 5-business day period in a margin account.

The SEC implemented the mandatory $25,000 minimum account equity requirement for accounts that qualified as “Pattern Day Trader” under NASD Rule 2520 and NYSE Rule 431. The PDT Rule attempts to protect small account retail traders. capital (under $25,000) by limiting the trading activity. The assumption is that retail customers with over $25,000 in account equity are assumed to be familiar with the accepted the risks entailed with day trading.

While establishing a minimum watermark, they also increased the buying power for margin accounts above the $25,000 watermark from 2 to 1 up to 4-to-1 margin or 25% margin requirement. Therefore, a margin account with $25,000 cash allowed for up to $100,000 for intra-day buying power and 2 to 1 on overnight positions, or $50,000 in this example.
Pattern Day Trader Rule Regulations
Once your account is labeled as a pattern day trader then you have to maintain at least $25,000 in equity in your account to make any day trades. The plus side to this is you will have more buying power available. For non day traders you only get 2:1 buying power but as a day trader you will get 4:1 day trading buying power.

So if you have $25,000 in your account, you will have $100,000 in day trading buying power to trade with for the day.

However, the day trading buying power can only be used on day trades as you will not be able to hold positions overnight when using it. Another important point to take note of is your account has to start the day with $25,000 in it.

The account can’t have $24,500 or anything less than $25,000 to start the day and then some of your holdings go up bringing your account to over $25,000 to get day trading buying power. It has to start the day with the $25,000 minimum.

If you are in a regular cash account then you can place as many day trades as you would like until your cash is used up. The only thing about this is you have to wait for your trades to settle before you can trade that cash again and this takes three days from the trade date for stocks and one day from the trade date for options.
Avoiding the PDT Rule in Today's Market
You may think you need a minimum of $25,000 cash balance in your broker account in order to day trade more than 3 times in a 5 day period.  Since most traders take 3-5 trades per day, they are considered Pattern Day Traders.  Many of our new and beginner students don't have $25k. There are brokers that are based off shore that do not adhere to the PDT rule such as Trade Zero (non-US only) and CME Group.

You can open a brokerage with as little as $500 at some places, and avoid PDT. We teach our students how to use these brokers and tools in our Warrior Starter Course. Start your instant access below to learn more about opening an account with as little as $500!
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