A pattern day trader is a designation given by the Financial Industry Regulatory Authority (FINRA) to those traders who execute four or more trades in the stock market in a margin account and in five business days. The condition to be followed is that the total number of day trades must be greater than six percent of the total trading activity performed by the dealer in the same five-day period.
One gets the title of Pattern Day Trader only if the person maintains an all through the minimum balance of $25,000 and if in any case, this falls below the mentioned amount, the person will be excluded from the class of pattern day trader until this amount is restored back.
The maximum trades that can be executed in a day are four. If someone exceeds this limit, the person gets a margin call and is given five consecutive business days to revert to the call. In this five-day period, the person can make only two trades per day. If the margin call is not answered in these five days also, then the trading of the trader gets restricted to just one trade per day for ninety days or till the call is responded to. During this time period, the buyer can only carry out cash trades.
Basis of PDT rule
Day trading gained widespread popularity in the 1990s and reached its peak time during 1999 and 2000. When later on the retail day traders suffered losses, the Securities and Exchange Commission (SEC) was rapid enough to change the rules and help the traders prevent from making similar mistakes. This was when the term Pattern Day Trader came into existence. The minimum $25,000 investment was done to limit the trading activity and to make the people familiar with all sorts of risks involved so as they might have an acceptable approach towards this commerce. The minimum investment also increased the trading limit from two trades per day to four trades per day.
Some facts about the PDT rule
A round trip constitutes the buying and selling of a stock or option within the same business day in either of pre-market, regular market or post-market sessions. Out of five consecutive business days period, only three round trip trades are permitted by the federation. One must definitely keep in mind of not violating any such rules and for this, keeping a track of one’s trading activity is very necessary. After a period of five days, in the next five days, the trader gets the other round trip and so the circle keeps going on.
Sort out the most profitable stocks or such stocks that have a higher probability of giving fair gains. This requires a high-level filtration process because being a PDT is a serious task if one dreams of earning hefty profits via this trade.
There are several examples of people becoming rich by means of day trading. No trade in the world exists without speculation. Therefore, it is very important to stay aware of all the rules and regulations every time because they can change too and if it happens, the trader should not encounter losses due to this reason.