Pattern Day Trader (PDT) Rule Explained

Readers Note: This information is intended to provide a general overview on day trading and the Pattern Day Trading (PDT) rule. For more detailed information, as well as the latest updates, readers are encouraged to review information published by industry regulators such as the Financial Industry Regulatory Authority (FINRA) and the Securities and Exchange Commission (SEC).

Day trading refers to the strategy of buying and selling financial instruments, such as stocks, options, or currencies, within the same trading day. The goal is to capitalize on short-term price movements, with positions typically opened and closed within several minutes, up to several hours. Some day traders make multiple trades in a single day, using technical analysis, chart patterns, and/or real-time market news to make quick decisions. This approach typically requires active monitoring of the markets throughout the day, and the ability to react quickly to market changes.

Because day trading is fast-paced and can involve short-term positions, it carries a high degree of risk when compared to buy and hold strategies. Traders aim to profit from small price fluctuations, and while this can be profitable, it can also expose day traders to significant losses. Day traders employ a wide range of strategies, and rely upon a disciplined approach and quick decision-making to achieve their goals. 

From a regulatory standpoint, day trading has a specific definition, particularly in relation to the Pattern Day Trading rule, which is enforced by the Financial Industry Regulatory Authority (FINRA). The Pattern Day Trading rule applies to those traders who execute four or more day trades within a five-day rolling period in a margin account. If you meet this threshold, you're considered a "Pattern Day Trader" (PDT) under U.S. regulations, and you must maintain a minimum balance of $25,000 in your margin account. This rule is designed to ensure that traders engaging in frequent day trading have sufficient capital to cover the risks of their activities.

According to the Financial Industry Regulatory Authority (FINRA), a Pattern Day Trader (PDT) is a trader who executes four or more day trades within a rolling five-day period in a margin account. Once a trader is classified as a Pattern Day Trader, they are required to maintain a minimum balance of $25,000 in their margin account. This requirement is in place to ensure that traders who frequently trade on margin have sufficient capital to manage the risks, and to absorb potential losses from high-frequency trading.

If the balance in the margin account falls below $25,000, the trader will be restricted from making additional day trades until the account is funded back to the required level. Day trading rules are designed to protect both individual traders and the broader market by ensuring that those who engage in high-frequency trading have the financial backing to support their activities, and minimize the potential for unmanageable losses.

It’s important to note that if a trader executes fewer than four day trades within a five-day period, he/she might still consider himself/herself a day trader based on their market approach. However, based on that level of activity, the trader might not be classified as a Pattern Day Trader by FINRA, and the $25,000 minimum balance requirement may not apply. 

The margin requirements for day trading are set by the Pattern Day Trading rule, which applies to traders using a margin account. Under this rule, traders classified as Pattern Day Traders (PDTs) are required to maintain a minimum account balance of $25,000 in their margin account. This requirement is designed to ensure that traders who engage in frequent, high-risk trading have enough capital to absorb potential losses, and to reduce the risk of unmanageable losses.

There is also a layer of complexity when it comes to starting day trading buying power (SDT), which is your account’s maintenance excess from the close of the previous trading day. It’s important to reference the help center documents to ensure you’re fully aware of all the rules and regulations related to day trading.

For traders who are not classified as PDTs, the margin requirements may be lower, and are based on the policies set by their broker. Like any other customer, these traders must comply with the margin requirements/rules outlined by their broker. These requirements/rules can vary by broker, and the type of security being traded. However, for those investors/traders designated as PDTs, the $25,000 minimum balance must be maintained in the account at all times. If the balance falls below this threshold, the trader will be restricted from making additional trades until the account is replenished.

A day trade “call” occurs when a trader who is classified as a Pattern Day Trader (PDT) fails to meet the minimum balance requirement of $25,000 in their margin account. This situation typically arises if the trader’s account falls below the required balance after executing multiple day trades, violating the Pattern Day Trading rule.

When a day trade “call” happens, the broker will notify the trader that their account is underfunded, and that he/she needs to deposit additional funds to meet the $25,000 minimum requirement. This is often referred to as a "day trade margin call." In these instances, the trader may be given a limited amount of time—for example, five business days—to restore the account balance to the required level. If the trader does not deposit the necessary funds within this period, the account will likely be flagged and restricted until the balance is restored.

A day trade “call” is a protective measure, designed to ensure that market participants who engage in day trading have enough capital to manage the risks associated with their market approach. As such, it is critical for day traders to actively monitor their account balance, and ensure that they maintain the necessary funds, in order to continue trading freely within this regulatory framework.

Learn more about margin calls and violations here

Day trading, like any investing or trading endeavor, carries inherent risks. The primary risks associated with day trading include market volatility, leverage, emotional decision-making, and overtrading. But there are other risks, and they vary based on the trader's unique strategy, outlook, and risk profile. 

One of the most significant risks for day traders is market volatility, as the value of securities can change rapidly within short time frames. Since day traders aim to profit from small price movements, even minor shifts in the market can result in substantial gains or losses. That means unpredictable developments can lead to unfavorable outcomes. That’s a key reason that day traders adhere strictly to a comprehensive risk management plan. 

Leverage is another key factor to consider. Many day traders use margin accounts, which entails borrowing money from the broker.. While leverage can potentially amplify profits, it can also magnify losses, sometimes exceeding the value of the original position. If the market moves against a leveraged position, it may result in significant financial strain, or even margin calls, requiring the trader to deposit additional funds. 

Emotional decision-making is another risk for day traders. The high-stress, fast-paced nature of day trading can cause traders to act impulsively, making decisions based on fear, greed, or impatience, rather than rational analysis. Emotional trading can lead to poor outcomes, such as chasing losses or making erratic trades, further compounding the risks involved. For this reason, many day traders embrace a systematic, disciplined approach. 

Another risk of day trading is known as “overtrading.” This behavior is characterized by a temptation to make more trades, in an attempt to recover from losses. Overtrading can produce unwanted outcomes. For example, excessive transaction costs, a higher likelihood of errors, and greater risk exposure. For day traders, controlling the urge to overtrade, and sticking to one’s risk management plan is therefore paramount.

• Day trading involves buying and selling financial instruments within the same trading day to capitalize on short-term market fluctuations.

• The Pattern Day Trading rule is governed by the Financial Industry Regulatory Authority (FINRA) and is designed to protect both traders and the market.

• As defined by regulators, a Pattern Day Trader (PDT) is a trader who executes four or more day trades within a rolling five-day period in a margin account.

• PDTs must maintain a minimum balance of $25,000 in their margin account to continue day trading.

• If a PDT’s account balance falls below $25,000, the trader’s account may be restricted until the required balance is restored.

• A “day trade margin call” occurs if a PDT’s account falls below the required $25,000 balance. Typically, the trader will be required to deposit additional funds before trading can resume. 

• The Pattern Day Trading rule ensures that traders who frequently engage in high-risk, high-frequency trading have enough capital to absorb potential losses.

• The Pattern Day Trading rule is designed to help manage the risks associated with day trading by ensuring that day traders have sufficient capital resources.