A pattern day trader (PDT) is a term that refers to a trader who uses a margin account in the execution of 4+ day trades in a range of 5 working days. Over six percent of the account’s overall trade activity during those five days must be made up of day trades.
When day traders do that, their account is flagged by the broker as PDTs. There are some limitations on further trading imposed by PDT designation, which was implemented to deter traders from engaging in excessive trading.
How Pattern Day Traders (PDTs) Execute Trades
Short sales and stock options are two examples of the various assets that PDTs trade. In fact, equity and stock options trades are the only ones allowed in pattern day trading.
PDTs have five working days to respond to margin calls. Until the calls are met, the broker will limit their trading to double the maintenance margin. Once five working days have passed, and the problem remains unresolved, nighty-day cash restricted accounts status is applied to such accounts.
Regulations of Pattern Day Trader (PDT)
The Financial Industry Regulatory Authority (FINRA) determines the pattern day trader designation, which is different from the designation of typical day traders in terms of the volume of day trades executed during a certain period.
It is a must for PDTs to own in their accounts no less than $25,000, even though both categories have mandated minimum assets that must be retained in their margin accounts. This sum can be made up of both securities and cash, it is not required to be all cash. PDTs won’t be able to practice day trading in the case that equity in their account drops a number less than $25,000.
To reduce the dangers, the PDT rule was introduced by FINRA, which mandates that every pattern day trader maintain in their account an amount of at least $25,000, as well as splitting between securities and cash. Pattern day traders are not permitted to practice day trading if the account's cash equity falls under the limit of $25,000.
Although the guidelines mentioned above are firmly established in the business, particular brokers interpret them more strictly. Some of these brokers permit their traders to identify themselves as day traders.
Although there may be account limitations and requirements, you should not always worry if your broker flagged you as a PDT. If this happens, be aware that you are subject to FINRA regulations and are permitted to trade only in a margin account that contains no less than $25,000.