Day trading limits: Everything you need to know

Spark Global Limited Reports:

Thanks to technological advances, trading stocks is now easier than ever.

Most brokerage firms allow day traders to trade stocks via the Internet, phone or even smartphones.

However, while the process of buying and selling stocks is easy, you can still be locked in trades or miss out on an excellent opportunity because of same-day trading restrictions.

Pattern daily Trading (PDT) restrictions
The pattern Day Trader (PDT) rule is a limit set by the SECURITIES and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) to limit the number of trades that can be executed in accounts with less capital. Includes margin accounts with a net liquidation of less than $25,000.

PDT rules were created shortly after the dotcom bubble of the late 1990s and early 2000s. PDT rules effectively hold pattern day traders to a higher standard using margin accounts than individuals using cash accounts. To do this, banks are required to keep large amounts of cash and/or securities in their accounts.

The two US stock market regulators designed the rule as a safety feature to help minimise the risks of day trading.

How does the pattern day Trader rule work
Day trading is when you buy or short a stock or other financial instrument and then sell or cover the same stock on the same day. People who indulge in this form of speculation are known as day traders. Here’s how the pattern day trader rule works:

If your brokerage account made four or more day trades in any rolling 5-day period, and those trades accounted for more than 6% of your account’s activity during that period, your broker will mark your account as a pattern day account.

When this happens, you must maintain a permanent balance of at least $25,000 in the marked account, even if it is an error.

Less than $25 K
If your account closes with less than $25,000, you will be restricted to clearing trades only the next day. Essentially, if you have $5,000 in your margin account, you can only execute 3 days out of any 5 business days.

Not every trader wants to keep $25,000 in his trading account. So be sure to keep a close eye on your transactions to prevent your account from being flagged.

However, in most cases, you usually don’t have to worry about wrongfully violating the PDT rules because your brokerage will notify you. If you don’t heed your broker’s warnings, they’ll freeze your account for 90 days.

More than $25 for K
An account with a balance of $25,000 or more can still be identified as a pattern day trader. In that case, you can still continue day trading as long as you don’t exceed the day trading purchasing power of your account.

That said, some brokers do allow one exception for clients flagged as day traders. As long as they promise not to use the account for pattern day trading in the future.

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