The Pattern Day Trader Rule

because so many people lost money daytrading equities during the bubble, the regulators decided that the days of letting anyone who wanted to daytrade the stock market to be able to without restriction were over. The SEC issued regulations which are referred to as the pattern daytrader rule, and states the following:

Traders who make 4 or more day trades within a week – 5 day period, unless his/her day-trading activities do not exceed 6% of his/her total trading activity for that time period, will be labeled pattern daytraders. Traders who are labeled Pattern Day Traders must maintain at least $25,000 in equity in their account on any day that they place a day trade.

For anyone who does not already know, a daytrade is referred to as any trade that is opened and closed within the same trading day. As a side note here, if a trader opens a position and then uses two orders to close that same trade, then this is counted as 1 daytrade.

If a pattern day trader exceeds the day-trading buying power limitation, the firm will issue a day-trading margin call to the pattern day trader. The pattern day trader will then have, at most, five business days to deposit funds to meet this daytrading margin call. Until the margin call is met, the day-trading account will be restricted to daytrading buying power of only two times maintenance margin excess based on the customer’s daily total trading commitment. If the daytrading margin call is not met by the fifth business day, the account will be further restricted to trading only on a cash available basis for 90 days or until the call is met.