Pattern day trader: Rules to follow

April 30, 2021
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The pattern day trader rule is a key part of day trading. Or is it? At Nadex, we believe you should trade your own way, managing your risk up front. Learn more about the pattern day trader rule and why trading on Nadex means you can’t break it.

The pattern day trader rule exists to limit the number of trades you place if you’re considered a day trader. It’s there to discourage excessive trading, so it’s helpful for traders navigating fast-paced markets where quick reversals are possible. But there’s another way to protect yourself when trading without the constraints of the pattern day trader rule.

Trading on Nadex offers complete freedom from the pattern day trader rule, so you don’t have to worry about how often you’re trading, or the number of contracts you buy or sell.

You’re protected by our fixed-risk contracts, meaning your losses can’t exceed your predetermined risk tolerance on a single trade – giving you a greater degree of control when day trading.

So, what is the pattern day trader rule, and how do you ensure you don’t break it? (Pro tip – one simple way is to trade on Nadex! Open your demo account to get started.)

What is a pattern day trader (PDT)?

A pattern day trader (PDT) is someone who:

  • Trades on a market regulated by the Financial Industry Regulatory Authority (FINRA).

  • Places four or more intraday trades over five consecutive business days, using the same margin account, and these make up more than 6% of account activity.

A day trade is considered to be the act of buying and selling (or selling and buying) on the same stock or option, within the same trading day. Day traders aim to make profits from short-term price movements. Anybody who places intraday trades (i.e., trades in and out of a position within the same trading day) is a day trader. However, only people who meet the above criteria are considered to be pattern day traders.

What is the pattern day trader rule?

The pattern day trader rule is a regulation that applies to day traders. It states that traders who place four or more intraday trades over five consecutive business days using a margin account must have at least $25,000 in cash and eligible securities.

How many day trades can a pattern day trader make?

A pattern day trader can make as many trades as they like provided they have $25,000 or more in cash and eligible securities. If they have less than that, they’ll be limited to executing fewer than four day trades over five consecutive days.

It’s important to understand that the pattern day trader rule doesn’t prohibit trading – it just places restrictions on it for the protection of traders.

Why is there a pattern day trader rule?

The pattern day trader rule was put in place by FINRA to protect traders with leveraged accounts. It’s intended to safeguard against traders being over-leveraged, which is useful to new and less-experienced traders since leveraged trades can run up huge losses very quickly.

But, there’s a flip side. For new traders wanting to try their hand at day trading, the PDT rule can be a huge barrier. And that’s where Nadex comes in. With a Nadex account, you’re protected by limited-risk contracts, so you always know exactly how much you could lose in the worst-case scenario. And you never have to worry about margin calls again.

What happens if you break the pattern day trader rule?

If you break the pattern day trader rule, your account gets flagged. You may be treated more leniently the first time around depending on the type of account you hold, and who with. You may be subjected to a margin call, then have five business days to meet the call. Trading is restricted, but not typically suspended at this point. If you fail to meet the margin call after five business days, it will likely result in a 90-day cash restricted account status, or until the issues have been resolved.

Can you day trade with less than $25,000?

Lots of traders don’t have $25,000 to deposit, and even if they did, they might not want to, especially if they’re just starting out. With Nadex, you don’t need $25,000 to day trade – you only need $250 to open an account! What’s more, there are no limits on the number of trades you can place, and you get to trade on an exchange regulated by the Commodity Futures Trading Commission (CFTC).

So, if the pattern day trader rule is there to protect traders, does that mean Nadex traders are at greater risk? No, because our contracts work differently to most leveraged options and derivatives in that each one is fixed risk – you can never lose more than you put into the trade, unlike with a margin account. With the opportunity to trade as much as you like and specify your own risk-to-reward ratios, there are plenty of opportunities while maintaining control by knowing all maximum risk upfront.

Practice day trading for free

You can start trading risk-free with a Nadex demo account, where you’ll get $10,000 in virtual funds to practice day trading. When you’re ready to upgrade to a live account, all you’ll need is a $250 initial deposit.

Learn more about day trading:

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