timothy sykes logo

Trading Tips-Tim Sykes Penny Stock

Pattern Day Trader Rules: Definition and How it Works

Timothy SykesAvatar
Written by Timothy Sykes
Updated 9/16/2023 12 min read

The Pattern Day Trader Rule — the PDT for short — is a set of restrictions created for the purposes of protecting “unsophisticated investors” …

Yes, that’s the official term!

The security commission has another term for frequent traders. A pattern day trader, as defined by the Financial Industry Regulatory Authority (FINRA), is a trader who executes four or more day trades within five business days. But there’s a catch. These trades must account for more than six percent of the trader’s total trades in the margin account for that same five business day period. If you meet these criteria, congratulations, you’re a pattern day trader!

But being a pattern day trader isn’t just about the title. It comes with specific rules and requirements that can significantly impact your trading strategies. From minimum equity requirements to buying power calculations, pattern day trading is a whole different ball game.

I’ll walk you through the definition, rules, and workings of pattern day trading, giving you the knowledge you need to navigate the trading world confidently. Let’s get started!

Overview of Pattern Day Trade Rules

© Millionaire Media, LLC

Before we dive into the nitty-gritty of pattern day trading, let’s get a bird’s eye view of the rules. The Pattern Day Trader Rule, enforced by FINRA, is the main regulation you need to be aware of. It sets the criteria for who is considered a pattern day trader and outlines the requirements they need to meet.

These rules aren’t there to make your life difficult — although they might do so anyway! They’re designed to protect both you and the market from excessive risk.

Brokerage firms will restrict access to assets, investment products, and other services if your weekly day trades exceed the number you’re allowed. Aspiring day traders need to be content with holding a security position overnight at times, if they want to maintain their trading rights!

This can be the basis for some bad trades. For example, avoiding the PDT can pressure traders to look for a fill later than they would otherwise, or consider selling past their risk.

Definition of a Pattern Day Trader

Post image

Get my weekly watchlist, free

Sign up to jump start your trading education!

A pattern day trader, as defined by the Financial Industry Regulatory Authority (FINRA), is any margin account customer who executes four or more day trades within five business days. But here’s the kicker: those trades must account for more than six percent of the customer’s total trades in the margin account for that same five business day period.

Difference Between Pattern Day Trading and Regular Trading

So, what’s the difference between pattern day trading and regular trading? It’s all about the frequency and the account type, my friend. Regular traders can be either cash account or margin account holders, but pattern day traders are strictly margin account holders. And while regular traders can make as many trades as they want, pattern day traders have specific rules they need to follow.

Day trading is the place where these two definitions collide. Day trading involves buying and selling securities within a single trading day, aiming to profit from short-term price fluctuations.

The one thing that both pattern day trading and regular day trading have in common is the need for education. Start by exploring the basics of day trading to get a solid foundation.

Margin Accounts and Requirements

Now, let’s talk about margin accounts. If you’re a pattern day trader, you’ll be doing your trading in a margin account. This type of account allows you to borrow money from your broker to purchase securities, potentially amplifying your profits. But be careful, it can also magnify your losses. And there are specific requirements you need to meet, like maintaining a minimum equity of $25,000. So, make sure you understand the ins and outs of margin trading before you jump in.

Margin Accounts and the Pattern Day Trade Rule

Margin accounts are like a double-edged sword. They can amplify your gains, but they can also magnify your losses. And if you’re a pattern day trader, you’re playing in the margin account arena. This means you’re borrowing money from your brokerage firm to purchase securities, which can be risky business.

Minimum Equity Requirement for a Pattern Day Trader

Here’s the deal: if you’re a pattern day trader, you need to maintain a minimum equity of $25,000 in your account on any day that trades are made. It’s not a suggestion, it’s a requirement. And if you don’t meet this requirement? You’ll get a margin call, and trust me, that’s a call you don’t want to receive.

Leverage & Margin Trading

Leverage can be your best friend or your worst enemy. It allows you to borrow money to increase your buying power, but it also increases your risk. So, if you’re a pattern day trader, you need to understand how to use leverage wisely.

Business Days & Trading Days Explained

Tim Sykes teaches penny stock trading from the stage
© Millionaire Media, LLC

When it comes to trading, timing is everything. And that’s where understanding the difference between business days and trading days comes in. A business day is any day that businesses are generally open, typically Monday through Friday, excluding public holidays. A trading day, on the other hand, is any day the stock market is open for business. Knowing the difference can help you plan your trades more effectively and avoid potential pitfalls.

What is a Trading Day?

A trading day is any day the stock market is open for business. Simple, right? But remember, it’s not just about the United States. If you’re trading international stocks or forex, you need to consider the trading days in those markets too.

What is a Business Day?

A business day, on the other hand, is a bit broader. It’s any day that businesses are generally open, typically Monday through Friday, excluding public holidays. But here’s the thing: not all business days are trading days. So, keep that in mind when planning your trades.

Calculating Your Buying Power as a Pattern Day Trader

tim sykes and kyle williams on laptops
© Millionaire Media, LLC

As a pattern day trader, your buying power is a key factor in your trading strategy. It determines how much you can trade on a given day. But calculating it can be a bit tricky. It involves understanding your account balance, your margin, and the specific rules of your brokerage. But don’t worry, once you get the hang of it, it’s a powerful tool in your trading arsenal.

Buying Power Calculation for Intraday Traders

As a pattern day trader, your buying power is four times the New York Stock Exchange (NYSE) excess as of the close of business on the previous day. Sounds complicated, right? But it’s crucial to understand this because it determines how much you can trade on a given day.

Initial Buying Power Calculation for Long Positions

When you’re going long, your initial buying power is the amount of money you have available in your account, plus any outstanding margin loans. But remember, if you’re a pattern day trader, you’re also subject to the $25,000 minimum equity requirement.

Initial Buying Power Calculation for Short Positions

Shorting stocks? Your initial buying power is the proceeds from your short sale, plus the required margin. But be careful, shorting stocks can be risky, especially if the stock price increases.

Maintenance Margin Requirements

Maintenance margin is the minimum amount of equity you need to maintain in your margin account. For pattern day traders, it’s usually 25% of the total value of the securities in your account. But remember, different brokers may have different requirements, so always check with your broker.

Regulations That Govern Pattern Day Traders

Pattern day traders are subject to specific regulations. These include the Pattern Day Trader Rule, which requires a minimum equity of $25,000, and the Margin Rule, which sets the minimum amount of margin a trader must maintain in their account. It’s not just about making money, it’s about following the rules too.

Of course, making money is important — and you need to know the basics of day trading for a chance at that! This includes knowing how to choose the right broker, understanding the market, and developing effective trading strategies.

If this sounds like something you need help with, check out my guide on day trading basics. It provides valuable insights that can set you on the path to becoming a successful day trader.

Ways Around the Pattern Day Trader Rule

So, you’re not a fan of the Pattern Day Trader Rule? You’re not alone. Many traders find it restrictive. But don’t worry, there are ways to work around it.

Whether it’s through multiple brokerage accounts or joining a proprietary trading firm, you have options. But remember, each comes with its own set of risks and requirements, and you’ll need the resources. Always do your homework before making a decision.

This homework starts with understanding what a day trade entails. If you don’t know this by heart, read this detailed explanation of the day trade definition. Understanding this concept can help you make informed decisions and develop effective trading strategies.

Open Multiple Brokerage Accounts

One way to sidestep the pattern day trader rule is to open multiple brokerage accounts. This isn’t a loophole, it’s perfectly legal. But remember, this strategy comes with its own risks. You’ll need to manage multiple accounts, and you’re still subject to the rules of each individual brokerage.

Join a Proprietary Trading Firm

Another option is to join a proprietary trading firm. These firms allow traders to use the firm’s capital to make trades, which can provide more flexibility. But remember, you’re trading with the firm’s money, so you’ll need to share your profits.

Key Takeaways

© Millionaire Media, LLC

Pattern day trading isn’t for the faint of heart. It requires a solid understanding of the stock market, a keen eye for patterns, and the ability to act quickly. But if you’re willing to put in the time and effort, it can be a profitable strategy.

It isn’t a silver bullet for your trading plan — but the PDT is one of many topics you should learn as part of your trading education!

Trading isn’t rocket science. It’s a skill you build and work on like any other. Trading has changed my life, and I think this way of life should be open to more people…

I’ve built my Trading Challenge to pass on the things I had to learn for myself. It’s the kind of community that I wish I had when I was starting out.

We don’t accept everyone. If you’re up for the challenge — I want to hear from you.

Apply to the Trading Challenge here.

Trading is a battlefield. The more knowledge you have, the better prepared you’ll be.

How do you handle the PDT? Let me know in the comments — I love hearing from my readers!

How much has this post helped you?

Leave a reply

Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”