Pattern Day Trading Rules Explained
The pattern day trading rule is a restriction imposed on retail investors. The law prevents traders from placing a certain number of trades over a short period. Understanding the restriction can help traders avoid legally required margin calls. In this guide, we explain what pattern day trading means, how to navigate the rules and where the restrictions apply.
US regulators are moving to scrap the long-standing $25,000 minimum equity rule for pattern day traders. FINRA approved a shift to intraday margin requirements in September 2025. The change is pending SEC approval but could make active day trading much more accessible to smaller retail investors.
What Does Pattern Day Trading Mean?
The pattern day trading rule was implemented by the US Securities and Exchange Commission (SEC) and the Financial Industry Regulatory Authority (FINRA) in 2001.
The purpose of the rule is to protect day traders in the US from the risks associated with leveraged retail trading accounts. Customers who are day trading must demonstrate they can afford to cover losses when trading on margin.
Pattern Day Trading Rules
A pattern day trader is someone who executes four or more day trades in a margin account within five business days, and those day trades represent more than 6% of the account’s total trading activity over that period.
If the account holder has met this threshold, this will result in a margin call enforced by the broker, meaning they’ll need to deposit more funds.
The guidelines state that during this time, a trader should only be able to close trades. If the individual meets the margin call, they can continue to trade. The minimum equity a pattern day trader must have in their platform is $25,000.
The pattern day trading rule applies to US securities traded in margin accounts, such as stocks (including penny stocks and ETFs) and stock options.
It generally does not apply to spot forex, most futures, or most cryptocurrencies, although some brokers may impose their own day-trading limits on those markets.
What Happens If You Pattern Day Trade?
There is no penalty for a pattern day trading violation other than the freezing of a margin account until more funds are deposited. The legislation does not apply to cash accounts. Since the restriction is implemented by the broker, the penalty can vary.
The flag is not permanent and does eventually go away. It will often last for 90 days, though if a broker is lenient the timeline can be reduced.
The ban does not apply to institutional stock brokers as it is designed to protect retailer traders. It is not illegal to be a pattern day trader, but those who are flagged as using the strategy must prove they can afford to cover the associated risks.
If you are pattern day trading with sufficient capital, when filing your taxes you may find you qualify for Trader Tax Status (TTS).
Examples Of Pattern Day Trading
The pattern day trading rule is simple when explained through examples. Let’s imagine Sarah has opened a margin account with $1000. If she were to short stocks in Apple on Monday and close the trade within trading hours on the same day, this would count as one day trade.
Let’s imagine she then goes long on Tuesday and closes the trade shortly after making a profit. If Sarah were to repeat this pattern on Wednesday and Thursday, this would be four day trades in a five day period and a warning would be placed on Sarah’s account.
How To Navigate Pattern Day Trading Rules
The pattern day trading rule was designed to protect retail traders from absorbing risks beyond their means, so looking for loopholes is not advised. But for those who cannot meet the $25,000 margin call, here are some tips for how you can navigate the pattern day trading rule:
- Hold positions overnight – The PDT rule only applies to day trades. Therefore, if you hold a position overnight, this would not count towards your four allotted trades.
- Premarket vs after hours – Opening and closing the same position on the same trading day does count as a day trade, even if it happens in premarket or after-hours; it only stops being a day trade if you hold the position overnight.
- Consider broker training implications – A broker can add a pattern day trading warning notice to an account if they have sufficient reason to believe this is one of your strategies. One common method is by noting any day trading training qualifications with the broker.
- Use a cash account – Pattern day trading is only applicable to margin accounts. If you are trading without margin (using a cash account) you can avoid the rule altogether.
- Sufficient capital – Pattern day trading is legal, however, you must have the capital in your account to show that you can afford to take the risk. If you have $25,000 to trade, you needn’t worry about the rule or how to disable it, just keep your account sufficiently topped up.
Is There A Pattern Day Trading Rule In The UK & Canada?
The pattern day trading rule applies to margin accounts carried by US broker-dealers regulated by FINRA. Traders using non-US brokers in the UK, Europe, India, Australia and most other jurisdictions are typically not subject to PDT, unless their account is actually held or cleared through a US firm.
Examples of brokers that apply pattern day trading rules on US margin stock accounts include major US firms like Interactive Brokers, Schwab, Fidelity, Vanguard and many app-based brokers such as Robinhood and Webull, as well as some non-US brokers that route orders through US clearing firms.
FAQs
Does My Broker Allow Pattern Day Trading?
If your margin stock account is held with a US broker-dealer regulated by FINRA (or a non-US broker that clears through a US firm), the pattern day trading rule will apply.
Local brokers in Europe, Asia or Australia usually aren’t subject to PDT for accounts held under their non-US licences, but platforms that offer US margin stock trading via a FINRA member will still need to enforce it.
You can avoid the rule by reducing the volume of day trades you exercise in a given period. You can also speak to your broker about how to disable and avoid pattern day trading warnings, for example.
What Happens If You Pattern Day Trade?
If the pattern day trading recognition software concludes you have met the threshold, you will be asked to deposit more capital into your account. Once you have done this, you can continue to trade as normal. If you do not, you will be restricted to closing trades only.
Does The Pattern Day Trading Apply For Forex?
No – the US pattern day trading (PDT) rule does not generally apply to spot forex trading.
Why Is Pattern Day Trading Bad?
Pattern day trading is not bad per se and is technically not illegal. However, day trading on margin is a risky activity. The rule aims to minimise the losses of traders who cannot afford the risk. It does this by freezing a retail account until they can prove they have sufficient funds to cover any potential losses.
Can I Be A Pattern Day Trader?
If you’re trading outside the US or you have the funds to ensure a minimum of $25,000 in your margin account at any one time, you’re free to day trade as much as you like. If you do not meet these requirements, you may be prevented from day trading.
How Does Pattern Day Trading Work?
A trader is classed as a pattern day trader if they execute a certain number of day trades within a short period. This triggers the broker to add a flag to their account. The trader must then prove they have sufficient funds to cover this strategy by depositing further capital.
Does Pattern Day Trading Apply To Crypto?
In some cases, the pattern day trading (PDT) rule does not apply to crypto, because PDT is a US rule for stock and options day trading in margin accounts, not for spot crypto on dedicated exchanges.
However, if you’re trading crypto inside a brokerage securities account (or via products structured as securities), that broker may apply similar PDT-style restrictions at the account level, so you still need to check your platform’s rules.