What is Pattern Day Trader (PDT) Rule?

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What is Pattern Day Trader (PDT) Rule?

In this video Ross, from Warrior Trading talks about the pattern day trader rule. This rule states that traders are allowed three trades in a 5-day period if your account is under $25,000 and it is a margin account.

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Hey everyone. Rose here, from Warrior Trading. I'm going to talk to you today about the pattern day trader rule, also known as the PDT rule.

This rule came into effect in 2001, and what it states is that if you're going to day trade more than three times in a five business day rolling period, that you need to maintain a minimum balance, in your trading account, of at least $25,000 dollars. Now, this is tough for a lot of beginner traders. I know it was tough for me when I first got started. I wasn't expecting to need $25,000 dollars in the account. Fortunately, there are a few different ways you can avoid being restricted by the PDT rule.

One way is to go ahead and trade with a cash account, and then you can day trade as much as you want, but, when you run out of cash, you've got to wait two days for trades to settle. The good news is that options trades settle overnight. So, if you have $10,000 dollars in your account, you could potentially take two or three options trades each day, knowing that they settle overnight, and the cash will be available for you to trade with again the next day. But if you're going to actively day trade, buy, sell, buy, sell, then you do need a minimum of $25,000 dollars.

Now something that's kind of interesting is that different brokers view "roundtrip" differently. So, each trade is considered a roundtrip. So, if you buy a thousand shares, and then you sell a thousand shares, that is one roundtrip, and it would count as one of your three trades in a five-day period. What happens, however, if you buy a thousand shares, you add another thousand shares, and then you sell 2000? Well, most brokers would still consider that one roundtrip. Even though you took three individual trades, you bought once, you bought a second time, going in the same direction, and then you sold all at once. What happens if you buy a thousand, and then sell 500, and then sell 500 more? Well, you did two sell orders, but you're still considered a roundtrip. You made one direction going up, and one direction coming back down. In this case, however, where you buy a thousand shares, you sell 500, and then you buy a thousand more, and then you sell the rest, that's going to count as two trades because you changed directions twice.

Now, with some of these complex orders where you're going forward, backward, forward, backward, different brokers will view it differently. So, it's important to check with your broker, and find out how they're going to account a roundtrip if you do change directions mid-trade, or if you just keep buying, buying, buying, buying, and then selling, selling, selling, selling.

All right, so I hope this has helped you understand the PDT rule. The biggest thing to remember is that you're limited to only three trades in a five-day period if your account is under $25,000 dollars, and it is a margin account. All right. Hope that's helpful. As usual, any questions, don't hesitate to reach out.


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