Why you must keep in mind the Pattern Day Trader rule while you trade
A pattern day trader or PDT Trader refers to a trader that trades more than four times throughout the course of five consecutive business days.
18:34 27 April 2019
Assuming that the percentage of day traders is equal to greater than six of that customer’s trading activity as a whole.
“Pattern Day Trader” and “Day Trader” refer to much the same thing, but do have a few notable specific differences. This is a point which people commonly confuse. That said, if you are looking to enter the world of stock trading and more specifically day trading, it is important that you know the differences between both of these terms. The Financial Industry Regulatory Authority clearly states what a pattern day trader is – their requirements differ from those of a regular day trader. It is important to keep in mind the PDT rule whilst you are trading in order to ensure that you avoid any problems which you could come up against, such as account suspensions should you fail to comply with the rules that have been put in place by FINRA.
First of all, how can you keep in mind the pattern day trader rule if you don’t know what this is rule refers to?! Let’s take a look at what FINRA defines the rule as! The financial industry regulatory authority define a pattern day trader to be a trader that executes or has executed more than four trades during the day within five consecutive business days – this is also assuming that these day trades which the trader in question executes is accountable for upward of six percent of that customer’s trading activity altogether in that account, for the same five consecutive business days. It is also often a requirement that any traders that are considered to be pattern day traders that they maintain a balance over $25k dollars or over in their trading account, as well as being only allowed to trade in margin accounts (margin trading, also known as “buying on a margin,” refers to the practice of the investor borrowing money from their broker in order to purchase a security – meaning that investors might be able to invest more money than they otherwise could have). The main thing to remember at this point is that, should you be in the position that you could end up being considered as a pattern day trader, that you should keep in mind the various requirements which they must meet and that they must adhere to.
While you are trading, you should constantly be aware of what the pattern day trader rule is and what it refers to, you should also watch your own trading activities closely and ensure that, should you be trading as much as what would be considered to be a pattern ay trader, that you are able to adhere to FINRA’s requirements, including most importantly maintaining a balance of over $25k in your trading account. There is a not a great deal of difference between which customers would be considered to be very active normal day traders, and those that would be considered to be a pattern day trader. For example, executing three day trades within five business days would place you right on the edge of the boundary of what would just be considered to be a day trader – at which point you would need to start adhering to the requirements that day traders are required by regulation to meet. If you have the intention of trading regularly, or most particularly on an almost daily basis, you should be as aware as you can possibly be of these rules and regulations, and what defines a day trader and what does not.
In order to help you bear in mind what a pattern day trader is and what the pattern day trader rule is, you should continually examine closely the trades that you are executing, as well as how regular these trades are and the amount of money that you are moving around at any particular time. An example of a regular day trader that is verging on the edge of becoming considered a pattern day trader might be someone such as this:
- Purchases 250 shares of company A on Monday
- Sells the same 250 shares of company A on the same Monday
- Continues to do exactly this for a further two out of the following four days available in the working week
If this person happened to execute just one more trade to make their total trading number for the week up to four, they would be considered a pattern day trader and would have to conform to the requirements that all other pattern day traders have to. If they had not planned for this and were only a normal trader, having entered into the territory of a pattern day trader unintentionally, they would most likely be unprepared for the rest of the rules that come with being a pattern day trader, and could face unexpected account suspensions and delays. If this were to happen, a lot of money that could have been otherwise made could be lost. For example, if you make 3 trades one week and then decide to make another without bearing in mind or realising that you will be entering into what FINRA classes as a pattern day trader, your account could be suspended until further investigations are carried out against you, even if your actions were not thought about previously and were done to be intentionally against the laws of trading.
It is essential that you keep in mind the pattern day trader rule while you trade, as if you do not, you could quite quickly end up being considered as one in the eyes of either FINRA, your stockbroker, or both. This would not be a desirable position to be in if you were not prepared for it, as you would most likely not be able to meet all of the requirements that a pattern day trader is required to, including maintaining a substantial balance of $25k in your trading account!