An Overview On Day Trading Rules For Pattern Day Traders

One must first be familiar with the following terminologies before one can truly comprehend the basics of day trading rules for pattern day traders: day trading, day trader, and pattern day trader, maintenance margin, and day trading buying power.

• Day trading refers to the buying and selling of securities, such as stocks, on the same day.

• Day trader is an individual who enters and exits a trade within the same trading day.

• Pattern day trader is a person who enters and exits a day trade at least four times within a five business day period.

• Maintenance margin is the minimum amount of equity that must be maintained in a margin account.

• Day trading buying power refers to the equity in a trader’s account at the close of business of the previous day, less any maintenance margin requirement.

After learning the basic terms relating to day trading, it’s now time to go down to the nitty-gritty of day trading rules, particularly for pattern day traders.

The FINRA (NASD) Rule 2520, or more commonly known as The Pattern Day Trading (PDT) Rule, was made effective on September 28, 2001. According to the rule, an equity balance worth $25,000 (or more) must be maintained in order to qualify in pattern day trading business. What is more, the required minimum equity must be in the trader’s account prior to any day trading activity and must remain there for no less than two business days after the day trade. Should the account fall below the $25,000 equity level, the pattern day trader will not be allowed to day trade until the account again reaches the $25,000 minimum requirement.

This rule grants pattern day traders a purchasing power that is up to four times their maintenance margin excess at the close of business the day before. According to the PDT rule, no pattern day trader can execute a trade more than their day trading purchasing power. If they do, brokerage firms will issue a day trading margin call, wherein one has five business days to deposit funds to meet the margin call. Those who fail to meet their special maintenance margin calls will be permitted to execute transactions only on a cash available basis for 90 days or until the special maintenance margin call is met.

There are plenty of risks associated with day trading. This rule, in general, was implemented so that pattern day traders can deposit and maintain certain levels of equity in their accounts – enough to support the risky nature of the business.