A Pattern Day Trade Rule is a rule imposed by the FINRA (Financial Industry Regulatory Authority) for any individual who takes more than 4-day trades in any form of securities for 5 consecutive business days. Once a person is flagged as a PDT, he/she has to maintain a minimum of 25000$ in their trading account in the form of Margin or other qualified assets. This is not illegal and is done to protect the capital of individuals as Day trading is considered a risky business. The PFD rule is applicable in the U.S and not in India.
Pattern Day Trade Rule-
In the United States, a Pattern Day trade rule is a designation given to a Day Trader by the (Financial Industry Regulatory Authority) commonly known as FINRA, who takes more than 4 intra-day Trades in the same script in the span of 5 days in a Margin account.
This FINRA rule applies to any individual who takes 4 or more trades (Buying & Selling) in a particular security for 5 consecutive business days from their margin account. This rule is not applicable for traders using their Cash account and is only applicable for their margin account. This Rule came into the picture in 2001 as protection towards small investors and traders who have limited capital. This rule discourages traders from making irrational decisions while trading and losing a major part of their capital. This rule was also implemented to encourage traders to follow the “Buy and Hold” strategy and hold on to their positions for more than 1 day.
A Day trader who is categorized as a Pattern Day trader has to follow certain rules- They have to maintain a minimum balance of 25000$ in their margin trading account or else their trading activity is restricted. This amount of 25000$ has to be maintained in their account in order to engage in further trading activity.
Legality-
Pattern Day Trade Rule is not illegal and is only imposed for the safety of a day trader’s capital, who engage in day trading. This is only applicable in the U.S and not in India.
Some Important Points for the Pattern Day Trade Rule-
- A person who takes 4 or more traders in a time span of 5 days from the same account is flagged as a PDT (Pattern Day Trader)
- Pattern day Trade is considered if a person initiates a trade in any of the securities such as Equity trading, stock options, or Short selling on an intra-day basis.
- Any trade that is carry forwarded to the next day or is not closed within the same day will not be counted towards the Pattern Day Trade.
- Once a PTD is identified by the broker, that particular account will face certain restrictions for any further trading.
- A pattern day trader must maintain 25,000$ in their margin account. The moment the total balance of their Cash & Margin account falls below 25000$. The trading restrictions will be imposed and no fresh positions will be allowed until the balance is restored to the mentioned threshold.
So to conclude, a Pattern Day Trading Rule is implemented for the safety of Retail traders who take too much risk in the Margin account. Being marked as a PDT is not a crime but is only done to protect individuals. A High threshold of maintaining 25000$ in their margin account is set for any Pattern Day Trader’s so that individuals with small capital don’t jump into trading and blow up their whole capital. This rule is only implemented in The U.S and not in India.