You’ve learned about different day trading strategies and you’ve found the perfect day trading software. All that’s left is to get started, right? Well, before you actually begin day trading, you ought to brush up on the rules and regulations of being a pattern day trader.
Defining a Pattern Day Trader
To become a pattern day trader, you need to make at least four-day trade within five business days. What makes a day trade? Two transactions involving the same security that happen within the same day. The transactions must offset each other, and the positions cannot be held overnight.
The Basic Regulations
You can trade as much as you want, as long as your account has a minimum of $25,000 on any day you trade. You have to start the day with $25,000, and if your balance falls below the minimum, then you’ll be forbidden from carrying out any more trades until you replenish the funds. The $25,000 can be a mix of different financial securities. Maintaining the $25,000-minimum affords you certain benefits, such as increased access to margin and being able to trade as much as you want.
Pattern day traders can trade up to four times in excess margin. If they exceed the limitation, then their account will have no more than five days to deposit funds to meet a day-trading margin call issued by a trading firm. Until then, the day trader is limited to only twice as much excess margin. When the trader takes more than five days to deposit the funds, they are restricted to trading with available cash for 90 days (or until they pay up). Once those funds are finally deposited, they must stay in the account for two business days following the deposit.
Whether you’re coming up with $25,000 or you’re trying to meet a margin call, you can’t cross-guarantee any of your accounts. You are only allowed to use the finances at your disposal.
Portfolio Margin Rules
There are different stipulations for day traders who use a portfolio margin account. Instead of a $25,000 minimum, these day traders’ limits start at $100,000. The $100,000 limit applies to brokerage firms with a real-time monitoring system that allows accounts to recalculate as anything happens.
There’s an even higher minimum equity requirement for prime brokerage accounts. These accounts allow trades to be executed away from the firm, and they may even have the same capabilities as the aforementioned accounts. However, unlike those other accounts, prime brokerage accounts have a minimum equity requirement of $500,000. If a firm doesn’t have the same capabilities of these prime brokerage firms, they have a minimum equity requirement of $150,000.
