Understanding the rule Your account will be flagged for pattern day trading if you make 4 or more day trades within 5 trading days, and the number of day trades represents more than 6% of your total trades in that same 5 trading day period. This rule only applies to margin accounts and IRA limited margin accounts.
You're generally limited to no more than three day trades in a five-trading-day period, unless you have at least $25,000 of equity in your account at the end of the previous day.
You could inform your broker (saying “yes, I'm a day trader”) or day trade more than three times in five days and get flagged as a pattern day trader. This allows you to day trade as long as you hold a minimum account value of $25,000—just keep your balance above that minimum at all times.
If you make four or more day trades over the course of any five business days, and those trades account for more than 6% of your account activity over the period, your margin account will be flagged as a pattern day trader account.
Essentially, if you have a $5,000 account, you can only make three-day trades in any rolling five-day period. Once your account value is above $25,000, the restriction no longer applies to you. You usually don't have to worry about violating this rule by mistake because your broker will notify you.
The simplest way to avoid being labeled a PDT is to refrain from making more than three day trades within five rolling business days. Additionally, keep the following in mind: Individual options contracts aren't necessarily considered day trades if they're part of a spread or larger order.
The idea behind the $25,000 requirement for day traders was that only professional investors would have that type of capital to keep in a brokerage account, thereby preventing smaller investors from burning up their own accounts via day trading.
Understanding the rule
If your account is flagged for PDT, you're required to have a portfolio value of at least $25,000 to continue day trading. Your portfolio value is the sum of your cash, stocks, and options, and doesn't include crypto positions.
According to FINRA rules, you're considered a pattern day trader if you execute four or more "day trades" within five business days—provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.
If you are a trader who occasionally executes day trades, you are subject to the same margin requirements as non-day traders. This means you must have a minimum equity of $2,000 to buy on margin.
Excessive trading and churning are unethical and illegal. Both are violations of securities rules and regulations and can cause enormous harm to customers.
Because of the PDT rule, traders without 25k are not allowed to day trade using margin. A cash account solves this problem. All transactions clear overnight and your funds are available the next trading day. Unfortunately, cash accounts cannot take spread trades, however, they are perfect for directional trading.
Assuming a margin requirement of 2%, a trader with a $5,000 account can open a position worth $250,000. This translates to 2.5 standard lots or 25 mini-lots. However, it is essential to note that margin requirements can change depending on market conditions.
As long as you have $25,000 or more in cash and eligible securities in your account, you can make as many trades as you want.
This caused the SEC and FINRA to enact Rule 2520, The Pattern Day Trader Rule, to try to prevent people from getting in over their heads in the future by requiring considerable funds to be in the account of any day trader using margin to buy and sell stocks.
A day trader might make 100 to a few hundred trades in a day, depending on the strategy and how frequently attractive opportunities appear. With so many trades, it's important that day traders keep costs low — our online broker comparison tool can help narrow the options.
A study of eToro day traders found nearly 80% of them had lost money over a 12-month period, and the median loss was 36%.
One of the most common requirements for trading the stock market as a day trader is the $25,000 rule. You need a minimum of $25,000 equity to day trade a margin account because the Financial Industry Regulatory Authority (FINRA) mandates it. The regulatory body calls it the 'Pattern Day Trading Rule'.
–If the market opens up inside of value and then trades out of value, the rule applies the same way. If the market can trade back inside value for two consecutive 30 minute periods, then it has an 80% chance of rotating to the other side of value.
A red flag is a warning or indicator, suggesting that there is a potential problem or threat with a company's stock, financial statements, or news reports. Red flags may be any undesirable characteristic that stands out to an analyst or investor. Red flags tend to vary.
Studies have shown that more than 97% of day traders lose money over time, and less than 1% of day traders are actually profitable. One percent!
Despite requiring a work ethic, being able to earn $1,000 per day is still highly achievable. Some opportunities will not require you to learn new skills. To make $1000/day with hot stock options, you'll need to know how to buy and sell stocks at the right time to buy and sell.
If you want to day trade to make millions a year, you'll likely be disappointed. Very few day traders, or even people in other professions, make millions a year. It takes more than just being great at something to become rich…. and becoming great is a lot of work in and of itself.