Do you actively trade in shares? If so, it is important to know what it means to be a 'pattern day trader' (PDT) because there are requirements associated with participating in pattern day trading. By understanding the requirements you must meet, you reduce the risk of your company imposing restrictions on your ability to act.
What is day trading?
Day trading refers to a trading strategy in which a person buys and sells (or sells and buys) the same security.in a margin accountthe same day in an attempt to profit from small movements in the security's price. FINRA's margin rule for day trading applies to day trading in any security, includingpossibilities.
Day trading in onecash accountis forbidden. All securities purchased in the cash account must be paid for in full before being sold.
Who is a pattern day trader?
According toFINRA Rules, you are considered a pattern day trader if you executefour or more "day transactions" within five working days– provided that the number of daily trades represents more than 6 percent of your total margin account trades for the same five business day period.
There are two methods to count daily transactions. Contact your brokerage firm for more information on how they count trades to determine if you are a pattern day trader.
The rules also require your company to designate you as a pattern day trader if it knows or has reasonable grounds to believe that you will engage in pattern day trading. For example, if the company provided you with day trading training before you opened your account, it could designate you as a model day trader.
Generally, once your account is coded as a pattern day trader account, a company will continue to consider you a pattern day trader even if you don't day trade for a period of five days because the company will have a "reasonable belief" that you are a pattern day trader based on your previous trading activities. If you change your trading strategy to stop your daily trading activities, you can contact your company to discuss the correct coding of your account.
What are the requirements for pattern day traders?
First, pattern day traders must maintain a minimum equity of $25,000 in their margin account on each day the client day trades. This required minimum equity, which can be a combination of cash and eligible securities, must be in your account before engaging in any day trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be allowed to trade until the account is restored to the $25,000 minimum level.
In addition, pattern day traders cannot trade beyond their "day trading purchasing power", which is generally up to four times the excess maintenance margin at the end of the previous day. Excess maintenance margin is the amount by which the equity in the margin account exceeds the required margin.
What should I do if I receive a margin call?
If a pattern day trader exceeds the day trading purchasing power limit, a company will issue a day trading margin call, after which the pattern day trader will have up to five business days to deposit funds to meet the call. Untilmargestortingis satisfied, the account will be limited to a day trading purchasing power of only two times the excess maintenance margin, based on the customer's daily total trading obligation. If the day trading margin call is not met by the deadline, the account will be further restricted to trading solely on available cash for 90 days or until the call is met.
Funds used to meet the minimum day trading requirement or to meet a day trading margin call must remain in the account for two business days after the close of business on each day the deposit is required. The use of cross-collateralization to meet day trading margin requirements is prohibited.
Why do I have to maintain a minimum capital of €25,000?
Day trading can be extremely risky, both for the day trader and for the brokerage firm that settles the day trader's trades. Even if you end the day with no open positions, the trades you made during intraday trading have most likely not yet been settled. Day trading margin requirements provide companies with a cushion to cover any shortfalls in your account due to day trading.
Most margin requirements are calculated based on a client's security positions at the end of the trading day. A client who only trades during the day will not have a security position at the end of the day where a margin calculation would otherwise result in a margin call. Nevertheless, the same customer has created financial risk during the day. These rules address this risk by imposing a margin requirement for day trading, calculated based on a trader's largest open position during the day rather than on open positions at the end of the day.
Companies are free to set a higher equity requirement than the minimum set out in the rules, and many of them do so. These higher minimum requirements are often referred to as 'house requirements'.
Is Pattern Day Trading Right for You?
Before coming to any conclusion, please read and consider the points in this articleDay Trading Risk Disclosure Statementcodified in FINRA Rule 2270. In addition to the minimum capital requirements, day trading requires knowledge of both the securities markets in general and, more specifically, your brokerage firm's business practices, including the operation of the firm's order execution systems and procedures.
Day trading is generally not suitable for anyone with limited resources, limited investing or trading experience, and a low risk tolerance. A day trader must be prepared to lose any money used for day trading. Because ofrisksDay trading activities may not be financed with retirement savings, student loans, subprime mortgages, emergency funds, assets set aside for purposes such as education or home ownership, or funds needed to meet living expenses.
