Once you are considered a pattern trader, there are certain rules and stipulations you must follow:
- Minimum account balance – The most demanding is holding an account balance of at least $25,000. If the total value of assets falls below that figure you will not have any buying power. It is also worth noting you cannot meet this requirement by cross-guaranteeing separate accounts.You can, however, meet this minimum requirement with a combination of eligible cash and securities.
- Existing sale conditions – Note the sale of an existing position from the previous day and its subsequent repurchase is not considered a day trade.
- Buying power – Your day trading power will be four times the New York Stock Exchange (NYSE) excess as of the close of business on the previous day. The ‘time and tick’ method of calculating day trading is acceptable. If you exceed this limitation a margin call will be issued.
- Outstanding margin call – If the account already has an outstanding margin call, your buying power will be reduced to just two times the NYSE excess. In addition, the ‘time and tick’ calculation technique cannot be used whilst the margin call remains outstanding. Instead, the aggregate method, which uses the total of all day trades will be used.
- Failure to meet margin call – If you fail to meet a margin call for more funds within five business days, your buying power will be further reduced to just one times the NYSE excess for ninety days (cash trades only), until you’ve met the call.
- Minimum requirements – When you deposit funds to meet minimum equity requirements or to meet margin calls the funds must remain in your account without withdrawals for at least two business days.
Despite the stringent rules and stipulations, one advantage of the PDT account comes in the form of leverage. Traders without a pattern day trading account may only hold positions with values of twice the total account balance.
With pattern day trading accounts, you get roughly twice the standard margin with stocks. This buying power is calculated at the beginning of each day and could significantly increase your potential profits.
However, it is worth highlighting that this can also increase losses. You could, in fact, lose more than yourinitial investment, and if you can’t subsidize that promptly your broker may liquidate your position.
A Title Hard to Shake
It is also worth knowing that if the broker provided you with day trading training before you opened your account, you may be automatically coded as a day trader. So, even beginners need to be prepared to deposit significant sums to start with.
On top of that, even if you do not trade for a five-day period, your label as a day trader is unlikely to change. Your broker will retain a ‘reasonable belief’ that you are a pattern day trader based on your previous activities.
Is the Rule Applicable to Cash Accounts?
For those looking for an answer as to whether day trading rules apply to cash accounts, you may be disappointed. The rules for non-margin, cash accounts, stipulate that day trading is on the whole not allowed. They are allowed only to the extent that the trades do not violate the free-riding prohibitions of Federal Reserve Board’s Regulation T.
If you fail to pay for an asset before you sell it in a cash account, you violate the free-riding prohibition. This complies the broker to enforce a 90-day freeze on your account.
Is the Rule Applicable to Options?
To answer the question on every options trader’s lips, do pattern day trading rules apply to options? The answer is yes, they do.
Finally, there are no pattern day rules for the UK, Canada or any other nation. These rules are set by the US FNRA and therefore apply only in the US.
Many traders ask do day trading rules apply to forex, stocks, options, futures, etc? But the truth is rules are usually more dependent on your broker and account. Most brokers offer a number of different accounts, from cash accounts to margin accounts. You will often find that each account comes with its own rules and regulations you’ll need to follow.
Below are rules to investigate before signing up with a new broker:
- Minimum deposit – Some brokers will require you to lay down considerably more capital than others when you open an account. These rules will immediately bring some brokers outside of many trader’s budgets. Beginners, for example, may want to look for brokers with low minimums whilst they find their feet.
- Daily trading limit – In general, limits are used to protect against volatility and market manipulation. However, they can also be used to minimize your losses, preventing you trading too much capital.
Day trading is also known as Scalping. Scalping is better known in the futures markets and Forex markets. Learning to enter properly, manage the trade and understanding your targets can be quite useful as a strategy during volatile markets.
Learn how to trade all shortAYterm strategies from Rob Roy in Power Option Plays