Dont Get Caught Out By The Pattern Day Trader Rule

Margin accounts essentially allow traders to borrow funds to buy securities — similar to short-term loans. While cash accounts are more akin to regular bank accounts in that no lending is allowed. The Pattern Day Trader Rule only applies to margin accounts, not cash accounts.

The potential for a higher return on investment can make the practice of pattern day trading seem appealing for high net worth individuals. However, like most practices that have the potential for high returns, the potential for significant losses can be even greater. A pattern day trader is a trader who executes four or more day trades within five business days using the same account.

Example Of Pattern Day Trading

The money must be in your account before you execute any day trades. You can meet the requirement with a combination of cash and securities. Price action trading However, they must reside in your day trading account at your brokerage firm rather than in an outside bank or at another firm.

These margin account day trading rules apply to all “Pattern Day-Traders” throughout the United States. Failing to meet the margin call will likely result in a 90 day freezing of trading activity on the trader’s margin account. The trader may be restricted to just using their cash account for the 90 days or until they have restored their margin account back to the $25K minimum. The PDT rule requires qualifying day traders to maintain minimum equity of $25,000 to be able to make more than four trades in a five-day period. However, many small traders, especially those just starting out, might find their trading activities being limited as a result of this rule.

Summary Of The Day

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 day-trading margin call. Until the margin call is met, the day-trading account will be restricted to day-trading buying power of only two times maintenance margin excess based on the customer’s daily total trading commitment. If the day-trading 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. Pattern day traders are also required to maintain a minimum of $25,000 equity in their account at all times.

The restrictions can be lifted by increasing the equity in the account or following the release procedure located in the Day Trading FAQ section. Both Futures/Futures Options and Forex are regulated by the NFA, which has no rules on day trading. As such, Futures/Futures Options and Forex round trips don’t count toward the PDT rules and funds covering margin on Futures/Futures Options and Forex positions don’t pattern day trading rules count toward the $25,000 FINRA equity requirement. The moment the equity falls below the $25,000 mark, the pattern day trader will have to abstain from any day trades until the time the account has sufficient balance. However, if you open two accounts, you can make six day trades in a five-day period—three trades for each broker. Do swing trading and enter trades that you hold for longer than one day.

Understanding Your Account Balance

It is tough to sit on your hands especially as the market moves and you are bombarded with promising trade alerts. You won’t be able to short stocks — Shorting stocks carries immense risk. Regulation T instituted by the Federal Reserve Board requires that traders who short a position, have 150% of the value of that position held in a margin account.

Interactive Brokers Australia currently offers margin lending to all clients EXCEPT Self- managed Superannuation Fund account holders (“SMSF”). For clients of Interactive Brokers Australia who are classified as retail, margin loans will be capped at AUD$25,000 (subject to change in IBKR Australia’s sole discretion). Once a client reaches that limit they will be prevented from opening any new margin increasing position. Classes with large single concentrations will have a margin requirement of 30% applied to the concentrated position. Accounts reporting equity below the $100,000 minimum will be subject to a margin surcharge, the effect of which will be to gradually transition the account to margin levels approximating those of the Reg. Those institutions who wish to execute some trades away from us and use us as a prime broker will be required to maintain at least USD 1,000,000 .

What Is A Pattern Day Trader?

An account with a day trade restriction will reduce Day Trade Buying Power to the equivalent of the Exchange Surplus without the use of time & tick for 90 days. Almost all day traders are better off using their capital in the forex or futures market. These markets require far less capital pattern day trading rules to get started, and even a few thousand dollars can start producing a decent income. There are several ways around the pattern day trader rule, and until recently, most of them were not ideal. You also won’t have any buying power in your cash account so you won’t be able to use leverage.

Another thing to consider when day trading is that securities held overnight can be sold the following business day. However, the proceeds from the sale of these positions cannot be used to day trade. If you do day trade positions held overnight, it will create a day trade call that will reduce your account’s leverage. For example, if you purchased $50,000 of XYZ company on Tuesday and held on to the position overnight, you could sell all $50,000 of XYZ company at the market open on Wednesday. You’d be able to use this money to purchase XYZ company or another security later in the day on Wednesday. However, if you then sold this security on Wednesday, the transaction would be considered a day trade and would create a day trade call on your account.

Author: Roger Cheng