Pattern Day Trader Definition: Day Trading Terminology

pattern day trader

Pattern Day Trader Definition: Day Trading Terminology

Pattern Day Trader (PDT) is a designation from the Securities and Exchange Commission (SEC) that is given to traders who make four or more day trades in their margin account over a five-day period. A day trade is when you purchase or short a security and then sell or cover the same security in the same day. The Pattern Day Trading rule was implemented back in 2001 as a safety feature to help reduce the risk associated with day trading as the previous rules were deemed insufficient.

 

Pattern Day Trader Rule Regulations

Once your account is labeled as a pattern day trader then you have to maintain at least $25,000 in equity in your account to make any day trades. The plus side to this is you will have more buying power available. For non day traders you only get 2:1 buying power but as a day trader you will get 4:1 day trading buying power. So if you have $25,000 in your account, you will have $100,000 in day trading buying power to trade with for the day.

However, the day trading buying power can only be used on day trades as you will not be able to hold positions overnight when using it. Another important point to take note of is your account has to start the day with $25,000 in it. The account can’t have $24,500 to start the day and then some of your holdings go up bringing your account to over $25,000 to get day trading buying power. It has to start the day with the $25,000 minimum.

If you are in a regular cash account then you can place as many day trades as you would like until your cash is used up. The only catch to this is you have to wait for your trades to settle before you can use that cash again and this takes three days from the trade date for stocks and one day from the trade date for options. You also won’t have any buying power in your cash account so you won’t be able to use leverage.