Pattern Day Trading Rules: What Investors Should Know | Ally (2024)


  • 3 min read

What we'll cover

If you're a regular day trader, you may know that understanding pattern day trading (PDT) rules can help you avoid complications. Even if you don't plan to day trade often, it's critical to understand exactly what constitutes a day trade.

First, what is a day trade?

Day traders open and close a position during the same day with the goal of profiting off any price changes, whether that means buying a security once the value goes up or short selling it if they think the stock will go down. Day traders try to use the market's volatility to their advantage, no matter which way it goes — up or down.

Like with all investing, but especially short-term, day trading comes with risk, since it's all about taking a chance on small price movements.

So, what is a pattern day trader?

Sometimes, day traders who use margin (increased leverage) with one account exceed four (or more) day trades in five business days.

When that happens, their brokerage firm must mark their account as that of a pattern day trader, provided that the number of day trades represents more than 6% of their total trades in the margin account for that same five-business-day period. Keep in mind a brokerage can choose to be stricter than the FINRA rules, so check the details with your specific firm.

Pattern day trading rules & examples

Patter day trading rules don't prevent trading — and they can help to protect traders.

What are the PDT rules?

PDT rules come from the Financial Industry Regulatory Authority (FINRA). Under the PDT rules, you must maintain minimum equity of $25,000 in your margin account prior to day trading on any given day. If the account falls below the $25,000 requirement, you cannot day trade until you are back at or above the $25,000 minimum.

Read Ally Invest's full day trading disclosure.

Brokers usually lock the account as soon as this rule gets triggered, but the lockout period varies, depending on the broker's guidelines.

You must follow the same margin requirements if you're an occasional day trader, meaning you must have a minimum equity of $2,000 to initially buy on margin and meet the Regulation T requirements .

You must have:

  • 50% of the total purchase amount

  • Keep at least 25% equity in your margin account

Examples of pattern day trading

Let's look at an example of what might constitute a day in the life of a day trader:

Pattern Day Trading Rules: What Investors Should Know | Ally (1)

Now, let's see how you might become “labeled" as a pattern day trader. Let's say you open a $10,000 trading account, then:

  • On Monday, you trade ABC stock.

  • On Tuesday, you trade DEF stock.

  • On Wednesday, you trade XYZ stock.

Since the pattern day trading rules trigger when you make four or more trades in a five business-day period, you can't day trade again until the next Monday. You can sell existing holdings provided they were not purchased the same day.

What happens if I’m flagged as a patter day trader?

Once your account triggers the PDT rules, your broker can issue you a margin call if you hold less than the minimum PDT equity requirement. You have, at most, five business days to deposit funds or eligible securities or raise your account to meet the call. If the call is not met, you may experience restricted, but not suspended, trading.

If you don't meet the margin call after five business days, your broker may place you under a 90-day cash restricted account status until you meet the $25,000 minimum.

Note: Ally Invest's Self-Directed Trading platform gives you a warning message if you start making your third day trade.

Leverage: A double-edged sword

Although you might think there is great benefit in accessing increased margin with a pattern day trade account, you can lose money.

In fact, when you day trade with borrowed funds, you can lose more than your initial investment. Since expenses can pile up quickly, you must monitor and control this expense.

Be prepared

Whether you’re a savvy trader or paper trading for the first time, take care to continue honing your investing skills and stay in-the-know on all things day trading.

Pattern Day Trading Rules: What Investors Should Know | Ally (2024)


Pattern Day Trading Rules: What Investors Should Know | Ally? ›

Under the PDT rules, you must maintain minimum equity of $25,000 in your margin account prior to day trading on any given day. If the account falls below the $25,000 requirement, you cannot day trade until you are back at or above the $25,000 minimum.

What is the 6% rule for pattern day traders? ›

Who Is a Pattern Day Trader? According to FINRA rules, you're considered a pattern day trader if you execute four or more "day trades" within five business days—provided that the number of day trades represents more than 6 percent of your total trades in the margin account for that same five business day period.

What is the 3-5-7 rule in trading? ›

What is the 3 5 7 rule in trading? A risk management principle known as the “3-5-7” rule in trading advises diversifying one's financial holdings to reduce risk. The 3% rule states that you should never risk more than 3% of your whole trading capital on a single deal.

How do you beat the pattern day trader rule? ›

Using a cash account is probably the easiest way to avoiding the PDT rule. The only set back with a cash account is you can only use settled funds. This means when you buy or sell a stock in a cash account, the money takes 2 days plus the trade (T + 2) date to settle before you can use them again.

What happens if you are flagged as a PDT but have over 25,000? ›

When a customer with more than $25,000 is flagged as a PDT, the customer can day trade for unlimited times if he/she has sufficient day-trading buying power(DTBP). Your DTBP is equal to the excess maintenance margin that is available in your account multiplied by two (or by four, brokers can adjust the leverage).

What is the golden rule of day trading? ›

Let profits run and cut losses short Stop losses should never be moved away from the market. Be disciplined with yourself, when your stop loss level is touched, get out. If a trade is proving profitable, don't be afraid to track the market.

How much money do day traders with $10,000 accounts make per day on average? ›

With a $10,000 account, a good day might bring in a five percent gain, which is $500. However, day traders also need to consider fixed costs such as commissions charged by brokers. These commissions can eat into profits, and day traders need to earn enough to overcome these fees [2].

What is the 11am rule in trading? ›

​The 11 am rule suggests that if a market makes a new intraday high for the day between 11:15 am and 11:30 am EST, then it's said to be very likely that the market will end the day near its high.

What is the 80% rule in trading? ›

If the market can trade back inside value for two consecutive 30 minute periods, then it has an 80% chance of rotating to the other side of value. –Context is extremely important. Do not trade this rule mechanically and expect to have good results.

What is the 80 20 rule in trading? ›

In investing, the 80-20 rule generally holds that 20% of the holdings in a portfolio are responsible for 80% of the portfolio's growth. On the flip side, 20% of a portfolio's holdings could be responsible for 80% of its losses.

How to avoid PDT? ›

Use multiple brokerage accounts to avoid the PDT Rule

Because many brokerages have commission-free trading, this can be a viable option to avoid PDT restrictions. While opening multiple accounts is one way to avoid PDT status, day traders should be cautious.

What is the most successful day trading pattern? ›

Ascending & descending triangle

This is one of the best chart patterns for day traders to know as it tends to indicate a breakout towards an upward trend. This means a good chance at making big profits. To draw the trend lines, look for two swing highs and two swing lows on your chart.

How do you avoid being flagged as a pattern day trader? ›

On the 2nd and 3rd day trades, you'll be given a few options to help avoid getting flagged. Switch to a cash account. A cash account isn't subject to PDT regulation. This will allow you to continue day trading and participating in the Stock Lending and Brokerage cash sweep programs.

Why do you need $25,000 to day trade? ›

Why Do You Need 25k To Day Trade? The $25k requirement for day trading is a rule set by FINRA. It's designed to protect investors from the risks of day trading. By requiring a minimum equity of $25k, FINRA ensures that investors have enough capital to absorb potential losses.

Why is pattern day trading bad? ›

Violating PDT rules can result in account restrictions, such as being barred from making further day trades until the account complies with the minimum equity requirement. Brokers may also issue margin calls, requiring traders to deposit additional funds to meet the minimum equity threshold.

How do I know if I have been flagged as a pattern day trader? ›

If you make four or more day trades over the course of any five business days, and those trades account for more than 6% of your account activity over the period, your margin account will be flagged as a pattern day trader account. (Note that you can day trade in a cash account.)

How many times can you day trade without 25k? ›

PDT Rule. Any US-based prospective day trader quickly learns about the dreaded pattern day trader (PDT) rule. The PDT essentially states that traders with less than $25,000 in their margin account cannot make more than three day trades in a rolling five day period.

What happens if you break the pattern day trader rule? ›

Account suspension: In some cases, a brokerage firm may suspend your account if you repeatedly violate the PDT Rule or other trading rules. The suspension may last for a certain period of time, or the firm may terminate your account altogether.


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