The Pattern Day Trading Rule is a regulation enforced by the US Securities and Exchange Commission (SEC) that requires traders who engage in Pattern Day Trading (PDT) to maintain a minimum account equity of $25,000 in order to continue trading.
Pattern Day Trading is defined as making four or more day trades within a five-business-day period in a margin account. Day trades are defined as buying and selling or selling and buying the same security on the same day. If a trader exceeds the day trading limit, they will be flagged as a PDT and must maintain a minimum balance of $25,000 in their account or their account will be restricted from making day trades for 90 days.
The PDT rule applies to traders who use margin accounts to trade, where they are borrowing funds from their broker to increase their buying power. The rule does not apply to traders who use cash accounts, where they trade with their own funds.
It’s important to note that the PDT rule is in place to protect individual traders from the risks associated with frequent trading, such as large losses and high commissions. Traders who exceed the day trading limit but do not have the required minimum equity will need to adjust their trading strategy to comply with the rule or face the consequences of a restricted account.