The PDT Rule: Limits on Day Trades

What counts as a day trade

Buying and selling the same stock on the same trading day (or shorting and buying back) counts as 1 day trade. Buying today and selling tomorrow is an overnight hold and doesn't count.

4 times in 5 trading days

In a margin account, making 4 day trades within any 5 consecutive trading days (and more than 6% of all trades in that period) gets you flagged as a pattern day trader (PDT). The window rolls forward every day.

$25,000 threshold

Once flagged as a PDT, your account equity has to stay at $25,000 or more to keep day trading; below that you'll be restricted. This is the long-standing US rule; FINRA has proposed changes, so check the latest rules from regulators and your broker.

Key takeaways

• Buying and selling the same stock on the same day counts as 1 day trade; buying today and selling another day doesn't.
• A margin account that makes 4 day trades within any 5 trading days (and they're more than 6% of its trades in that period) is flagged as a PDT.
• Once flagged, the account must keep equity above $25,000 to keep day trading, and is restricted when it falls short.
• Cash accounts aren't subject to the PDT rule but must follow the settlement rules. FINRA has proposed changes to the PDT rule; go by the latest rules from regulators and your broker.

Try it yourself

You can do these exercises in this lesson's interactive simulation:

1. Click “Example: one day trade every day”, then step forward a day at a time with the arrows: on which day are you flagged?
2. Set account equity to $8,000 and then $30,000: how is the outcome different once you're flagged?
3. Click “Example: one every other day”: what's the most you ever have in the rolling window? Are you flagged?
4. Switch to a cash account: does the PDT rule still apply? What do you need to watch out for?

Quiz and explanations

1. A margin account makes 1 day trade each day from Monday to Thursday. What happens?

Answer: It's flagged as a PDT.When the 4th day trade within 5 trading days happens, the account meets the PDT criteria.

2. An account flagged as a PDT has only $10,000 in equity. What happens?

Answer: Day trading is restricted until equity is topped up to $25,000.A PDT account needs at least $25,000 in equity; when it's short, the broker restricts day trading.

3. Which of these is not a day trade?

Answer: Buy on Monday and sell on Wednesday.A day trade means opening and closing within the same trading day; buying Monday and selling Wednesday is holding overnight.

Terms in this lesson

• cash account (Cash Account): An account that can only buy shares with your own money, with no borrowing or short selling. It isn't subject to the PDT rule, but sale money has to settle before it can be reused “cleanly”.
• day trading (Day Trading): Buying and selling (or selling and buying back) the same stock within one day, holding nothing overnight. Ordinary A-shares can't do this because of T+1; US and Taiwan stocks allow it, each with its own limits and fee rules.
• good-faith violation (Good Faith Violation (GFV)): In a cash account, buying shares with unsettled sale proceeds and then selling the new shares before that money settles. After a few violations within 12 months, the account can only buy with settled cash.
• margin account (Margin Account): An account that lets you borrow money from your broker to buy shares, or borrow shares to sell short. It magnifies gains and losses, and if the account value drops below the maintenance level you have to add funds.
• pattern day trader (PDT) (Pattern Day Trader): Someone who makes 4 or more day trades within any 5 trading days in a margin account (and those trades are a certain share of all trades in that period). Once flagged, the account needs at least $25,000 in equity to keep day trading.