Pattern day trading rules or PDT rules are rules related to FINRA regulated brokers.
What is the pattern day trading rule?
The pattern day trade rule or PDT rule refers to the FINRA and SEC guidelines, which state that a day trader must maintain minimum equity in margin account $25,000. By PDT rule, if a trader has less than $25000 in a margin account and creates 4 or more trades in 5 business days broker can freeze his account for 90 days. If the trader has a margin account over $25,000 in equity, the trader can apply day trading as many times as he wants, trade without limitations, as long as his or her margin account remains over $25,000.
So far, it seems that new traders must have at least $25,000 in cash to begin day trading. This can be overwhelming and prevent many people from getting started. Fortunately, you do not actually need this sum of money to begin; you only need to abide by this if you fit the criteria for a day trader.
The pattern day trade rule or PDT rule applies only to all FINRA regulated brokers.
Let us see PDF rules and stocks trading.
The last part of the sentence is the key piece of information “inside of a margin account.” The definition of a pattern day trader includes quite a few limitations.
Does the PDT rule apply to forex?
Do pattern day trading rules apply to forex?
Pattern day trading rules do not apply to forex because NFA and FINRA do not have restrictions on day trading for forex, futures options, and futures. Because of NFA and FINRA regulations, covering margin on Futures, Futures Options, and Forex positions doesn’t count toward the $25,000 FINRA equity requirement as well.
So, let summarize:
Is there a PDT rule for forex?
The pattern day trade rule or PDT rule does not apply to forex traders because they are created only for stock traders for FINRA regulated brokers.
First of all, what exactly is considered a day trader?
If you’re interested in day trading, you probably have at least a bit of knowledge on what a day trade actually is, but you may not know an important piece of information. The definition of a day trade is when you purchase and sell a stock between the market open and the market close for the same day. If you were to hold your position overnight, the trade would no longer be considered a day trade; instead, it would be considered a swing trade.
Therefore the pattern day trade rule does not limit you from making more than three trades per week with a small account balance. The rule only limits you from making three intraday trades per week. You may be thinking to yourself that 3 intraday trades it not much at all. In my opinion, I would say that the pattern day trade rule is actually a good thing for new traders. In this impact, you would need to have a relatively small account size in the first place. This small account size is likely due to a lack of experience, hence the small balance. PDT rule will prevent you from making many unnecessary trades and blowing your whole account as many new traders have tried to trade between every dip and rise.
The second criteria to the pattern day trade rule
The second requirement to be considered a day trader is to make at least 4-day trades a week. This may not seem like a lot, but that is actually quite a bit.
Why does the PDT rule exist
Pattern day trade was created to ensure that smaller inexperienced investors and traders don’t day trade until their accounts value over $25,000. This amount for SEC represents enough risk capital to offset any self-inflicted damage trading might create financially. The SEC’s primary mission is to protect investors and maintain the integrity of securities markets (both formal exchanges and over-the-counter). The SEC considers day trading to have a significantly higher risk than buy and hold strategies.
If you’ve never heard of leverage, allow me to explain. Leverage is where the broker you are with will allow you to trade with more than you have. Some brokerage will put up a 4:1 ratio or even a 6:1 ratio. Basically, if you have $1000, you could trade with $4000 or even $6000 in certain cases. Even though this may seem enticing, I would not recommend it. The reason for this is that you can lose much more than trading with your own money. This is because it will not feel like you are trading with your won money. Therefore you will have a lot less emotional attachment to it. Using leverage is not recommended for this very reason. If you are not planning on using leverage, then you will not need a margin account.
The final part of the pattern day trader rule is that it only applies if you utilize a margin account. If you are using a regular cash brokerage account, then the rule will not impact you.
Day trading rules under 25k
By PDT rule, if a trader has less than $25000 in a margin account and creates 4 or more trades in 5 business days broker can freeze his account for 90 days. Usually, the first trader will get a warning message, and then, if the trader does not stop day trading behavior, the account will be frozen.
If you have opened a cash or margin account under $25K and wish today’s trade, then this is still possible; you will need to find loopholes with the rule.
As I stated before, if you have a cash account, then you will be just fine to day trade without leverage and not have to worry about this rule. This is a great option since it will encourage you to be smart with your money and take calculated positions.
You will also be able to day trade in foreign exchange markets and forex if that interests you. You will be able to make more trades and utilize less money.
You have opened a margin account and wish to make more than 4 intraday trades with a week. In this case, you will need to maintain a balance of at least $25k within your margin account to abide by the pattern day trade rule.
Day trading rules over 25k
If the trader has a margin account over $25,000 in equity, the trader can apply day trading as many times as he wants, trade without limitations, as long as his or her margin account remains over $25,000. If the margin account at any moment drops below $25000 in equity, PDT restrictions can be applied.
Situations where the pattern day trade rule may apply
For example, let’s say that you decide to open up a margin account with a broker and deposit $15,000. On day 1 (Monday), you decide to buy and sell leveraged shares of stock XYZ. On day 2 (Tuesday), you acknowledge and sell stock ABC. On day 3 (Wednesday), you short sell DEF. Finally, on day 4(Thursday), you buy and sell both ABC and XYZ shares. This would be counted as 5 trades in 4 days, which would place you under a pattern day trader’s criteria. Let’s say in this scenario; you have $20,000 in your brokerage account; to follow the FRNA guidelines, you would have to deposit an extra $5,000.
Tips for following the pattern day trade rule
In the beginning, this rule can cause a lot of frustration. It limits you on what you can do with your own money. Over time you will find ways to work around it! It can be tough to watch the market rise and fall and not take any action. In this case, it would be a good idea to use a practice account t times. Paper trading is great for building your skills. I suggest that you do your best to maintain profitability and not lose too much of your paper profits. Paper trading is far more comfortable than trading with real money. This is again because paper-trading will give you no emotional attachment as it is not real money. You’ve probably heard the statistic that 90%+ of day traders lose money. This is due to a lack of emotional discipline, which must be formed over time and practice. Contrary to popular belief, you don’t need to make that many trades in a week to achieve wealth. What’s more important is making the right trades. Keep reading to learn some more tips on how to avoid joining the 90% statistic!
Avoid using too much leverage.
Although I already mentioned this, it deserves to be repeated. Using leverage is a great way to lose a large sum of money. Why, may you ask? Because you are using someone else’s money on a position that may not work out. If you open up a cash account instead of a margin account, this is something you don’t have to worry about.
Don’t make more than three-day trades a week.
This is especially important for newbie traders. This is a good rule to follow whether you have a margin account or a cash account. Buying shares of multiple stocks that interest you will hinder your concentration. When day trading, it is important to stay focused, so it is usually better to take fewer positions.
Focus on the 80-20 principle
The 80-20 principle is probably something you’ve heard of before. The 80-20 code is something that can be applied to a wide variety of things. The stock market is a significant aspect that can be used in the stock market. The stock market basically means that about 80% of your income will come from 20% of your trades.
Goal setting is essential in general. Investing in the stock market is no exception. Goals are important in the stock market because, without defined plans, you won’t have anything to work towards. Think about what you would like to accomplish by trading stocks. Whether it’s financial freedom or buying a new Ferrari, setting goals is something you should definitely practice.
Learn as much as possible
If your a newbie to the stock market, then the best advice I can give you is to learn as much as possible. Understanding the stock market’s ins and outs will take time, but it will be worth it because it will give you the best chance at making it big in the stock market.
Does PDT apply to futures?
No, the PDT rule or Pattern Day Trading rule does not apply to futures day trading in the US. Because of NFA and FINRA regulations, covering margin on Futures, Futures Options, and Forex positions doesn’t count toward the $25,000 FINRA equity requirement.
Now you know exactly what the pattern day trade rule is and who it impacts. Hopefully, you found this article informative as well as entertaining to read.
Pattern Day Trading Rules do not apply to forex, so all these article facts are important only for stock traders.