Hi Florrie,
This rule, established by the Financial Industry Regulation Authority (FINRA), applies to traders in the US with margin accounts, and allows you to trade with higher leverage (1:4) than otherwise may be available.
Essentially, you may be classed as a ‘pattern day trader’ if you make over three day trades in five business days, provided the number of trades is over 6% of the total trades in your account during this period.
To be a day trade, it must be in the same instrument in the same trading day, such as buying and then selling a stock (if you hold a position overnight it won’t count).
If you are classed as a pattern day trader, there are various rules you must follow and things to be aware of, notably:
- You must maintain an account balance of at least $25,000.
- Your buying power will be 4x the NYSE excess as of the end of business on the previous day.
- If your account already has an outstanding margin call, your buying power will be reduced to 2x the NYSE excess.
- If you fail to meet a margin call within five business days, your buying power will be further reduced to 1x the NYSE excess for 90 days until you’ve met the call (you can make cash trades only).
- After depositing funds to meet minimum equity requirements or margin calls the funds must stay in your account for at least two business days.
You can find more information about the pattern day trader rule and other stipulations that apply in the US here.
James Barra