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Are You a Pattern Day Trader? Let’s Find Out

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Knowing how to fully define yourself in the world of investment and trading can be difficult. If you’re new to the landscape, and you’re in the process of choosing what you want to accomplish with your efforts, it’s important to do as much research as possible. The more time you spend learning about your options, the less likely it is that you’ll make the wrong choice about your future.

One common option is to invest in regular daily purchasing and selling activities, that could allow you to make profits on minor changes in the market. This is a practice better known as day trading, and it appeals to a lot of people who enjoy the stock market. However, there are different kinds of day trading available to consider, and some have more rules than others. Let’s take a look.

Defining the PDT Rule

Becoming a day trader doesn’t always mean that you’re going to make multiple movements with your accounts every day. However, there are some people who do choose to do this. This is usually the case if you’re trying to make a career out of your activities. The PDT rule, as defined by FINRA is something you’ll need to be aware of in this case.

Essentially, it means that if you make four or more transactions within five days with a margin account, you’re defined as a pattern day trader. This is only true when the number of transactions made account for more than 6% of the total activity of the account during the time period. When you are flagged with this rule, you will be required to adhere to specific restrictions. When you are flagged by the PDT rule, then you will be hit with a margin call that you need to answer as quickly as possible. You may have your activities restricted during this time, until you have met with the rules of your account.

Adhering to the Rules and Regulations

Becoming an effective day trader means knowing how to understand when accounts are going to increase and decrease in value. You can try things like shorting stocks as a way of making cash off assets that you know are going to lose value for instance. However, you also need to ensure that you’re following the regulations in place to make such trading fair.

One of the most important rules is that if you are defined as a pattern day trader, you will need to keep at least $25,000 in your margin account at all times. If your account value ever drops lower than this, you will face repercussions. You may not be able to conduct purchases or transactions until you have met with the restrictions placed on you. If you fall victim to the rules too many times in a short period of time, you could find that you are no longer allowed to use a margin account. Simply switching to another brokerage to access a new margin solution is usually not an option in this case.

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