Pattern Day Traders
  1. Stock Traders’ vs. Stock Investors' Roles in the Marketplace
  2. Decision-Making Methods: Informed, Uninformed, Intuitive
  3. Informed Traders: Fundamental Traders, Technical Traders
  4. Swing Traders
  5. Buy and Hold Traders
  6. Value Traders
  7. Trend Traders
  8. KISS Traders
  9. Momentum Traders
  10. Range-bound Traders - Break-out Traders - Channel Traders
  11. Options Traders
  12. Options Seller Traders
  13. Day Traders
  14. Pattern Day Traders
  15. Intra-Day Traders
  16. Intra-Day Scalp Traders
  17. Introduction to Stock Trader Types
  18. Contrarian Traders
  19. Active and Passive Traders
  20. Futures Traders
  21. Forex Traders
  22. Online Stock Traders
  23. Pivot Traders
  24. News Traders
  25. Noise Traders
  26. Sentiment-Oriented Technical Traders
  27. Intuitive Traders
  28. Price Action Traders
  29. Price Traders
  30. Detrimental Traders
  31. Unsuccessful Types of Stock Traders
  32. Conclusion

Pattern Day Traders

If a day trader makes four or more day trades in a rolling five business day period, the account will be labeled immediately as a Pattern Day Trade account. Certain limitations will then be applied based on the account equity. (Account equity is the amount of cash that would exist if every position in the account were closed. This is also known as the liquidation value.)

pattern day trader is one who trades the same security four or more times per day (buys and sells) over a five-day period, and for whom same-day trades make up at least 6% of their activity for that period. According to the rule, traders are required to keep a minimum of $25,000 in their accounts and will be denied access to the markets should the balance fall below that level. There are also restrictions on the dollar amount that they can trade each day. If they go over the limit, they will get a margin call that must be met within three to five days. Further, any deposits that they make to cover a margin call have to stay in the account for at least two days.

The pattern day trader rules were adopted in 2001 to address day trading and margin accounts. The U.S. Securities and Exchange Commission (SEC) rules took effect February 27, 2001 and were based on changes proposed by the New York Stock Exchange (NYSE), the National Association of Securities Dealers (NASD), and the Financial Industry Regulation Authority (FINRA). The changes increased the margin requirements for day traders and defined a new term, “pattern day trader.” The rules were an amendment to existing NYSE Rule 431, which had failed to establish margin requirements for day traders.

Benefits for pattern day traders

If the pattern day trader can maintain the minimum balance requirement of $25,000, there are certain benefits for this type of account. Increased access to margin - and therefore increased leverage - can be one of them.

For non-pattern day trade accounts with standard access to margin, traders may hold positions in value up to twice the amount of cash in their account. For example if the account has $30,000 in cash, the trader can buy up to $60,000 worth of stock. The trader uses the $30,000 and the brokerage firm lends the trader the remaining $30,000 on margin and charges interest on the loan.

Pattern day trade accounts will have access to approximately twice the standard margin amount when trading stocks. This is known as Day Trading Buying Power and the amount is determined at the beginning of each trading day. When trading stock, Day Trading Buying Power is four times the cash value instead of the normal margin amount cited above. So in the previous example, the trader would be able to trade up to $120,000 worth of stock.

Leverage and margin are trading tools and are meant to be used wisely. Financially speaking, leverage is when a small amount of capital is able to control a much more expensive asset or group of assets.

When trading and investing, leverage has the ability to magnify the skill set of the trader. If the trader is adept and able to profit while trading, leverage (margin) may help the trader to make profits faster and/or in larger quantities.

Caution for pattern day traders

If traders are not proficient, losses will rack up more quickly and in larger amounts when using margin.

When a trader day trades with borrowed funds (margin/day trading buying power) it is possible to lose more than the initial investment. A decline in the value of stock purchased may cause the brokerage firm to require additional capital to maintain the position. Absence of an immediate additional capital infusion may cause the broker to liquidate client positions at its discretion.

Intra-Day Traders

  1. Stock Traders’ vs. Stock Investors' Roles in the Marketplace
  2. Decision-Making Methods: Informed, Uninformed, Intuitive
  3. Informed Traders: Fundamental Traders, Technical Traders
  4. Swing Traders
  5. Buy and Hold Traders
  6. Value Traders
  7. Trend Traders
  8. KISS Traders
  9. Momentum Traders
  10. Range-bound Traders - Break-out Traders - Channel Traders
  11. Options Traders
  12. Options Seller Traders
  13. Day Traders
  14. Pattern Day Traders
  15. Intra-Day Traders
  16. Intra-Day Scalp Traders
  17. Introduction to Stock Trader Types
  18. Contrarian Traders
  19. Active and Passive Traders
  20. Futures Traders
  21. Forex Traders
  22. Online Stock Traders
  23. Pivot Traders
  24. News Traders
  25. Noise Traders
  26. Sentiment-Oriented Technical Traders
  27. Intuitive Traders
  28. Price Action Traders
  29. Price Traders
  30. Detrimental Traders
  31. Unsuccessful Types of Stock Traders
  32. Conclusion
RELATED TERMS
  1. Trading Margin Excess

    The funds that remain in a margin trading account that are available ...
  2. Liquidation Margin

    Liquidation margin refers to the value of all of the equity positions ...
  3. Pattern Day Trader

    An SEC designation for traders who trade the same security four ...
  4. Maintenance Margin

    The minimum amount of equity that must be maintained in a margin ...
  5. Minimum Margin

    The initial amount required to be deposited in a margin account ...
  6. Day Trader

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RELATED FAQS
  1. What qualifies a person as a day trader?

    As of Sept 28, 2001, the NASD (now, FINRA) and NYSE amended their definitions of day traders. A new term that they use is ... Read Answer >>
  2. What is the difference between extensive margin and intensive margin in economics?

    Find out why it is important for traders to understand the difference between initial margin requirements and maintenance ... Read Answer >>
  3. How is buying on margin regulated by the Securities and Exchange Commission (SEC)?

    Learn how FINRA and the Federal Reserve regulate margin account trading, and understand how pattern day trading can impact ... Read Answer >>
  4. How much can I borrow with a margin account?

    Understand the basics of margin accounts and buying on margin, including what amount investors can typically borrow for purchases ... Read Answer >>
  5. What are my options when I get a margin call?

    Understand what a margin call means and the two primary options for meeting a margin call, such as depositing additional ... Read Answer >>
  6. What's the difference between a cash account and a margin account?

    Compare and contrast margin and cash accounts. Margin accounts offer short-term loans, leverage on existing portfolios, and ... Read Answer >>

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