A trader positioned under the Financial Industry Regulation Authority (FINRA) following the rules devised by this federation is referred to as a pattern day trader. The pattern day trader rule also known as PDT rule states that a dealer who makes 4 or more-day trades in 5 consecutive business days within a margin account on the condition that the total number of these trades is more than 6% of the entire buying and selling doings of the purchaser in that same five-day period.
The rule mentioned above is only the basic rule or the definition of a pattern day trader. There are many important terms and conditions associated with this. A trader who day trades can only come under the category of a pattern day trader. Day trading is basically the activity of buying and selling the equity or equities on the same business day in any of the pre-market, regular or post-market sessions. Any trade carried forward to the next day is not at all included in day trading range.
Another decree is that the trader can only trade in a margin account and should compulsorily have minimum security of $25,000 in the form of cash or other equities. A dealer can only execute up to the utmost of four trades in a single business day. Upon beating this limit, the association issues a margin call which has to be answered within five successive business days and during this duration, the customer’s trading activity is bounded to only two trades per day. In case the call is unanswered even in these five days, the buyer can only deal one trade per day and that too only in terms of cash trades for a period of 90 days or till the time the margin call is reverted to.
Any trader who is not a pattern day trader can automatically be included in this group if the person sufficiently fulfills all the required conditions.
What is Round Trip?
One only has permission to make three-day trades in a period of five continuous business days. If one buys the same stock but in three trades on a single day and then sells the whole lot in one day, it can be taken as one day trade or even three-day trades. On the contrary, if one buys stock in one trade and does the selling of that stock in three trades and if this is all done on the same business day, it can be accounted to as one day trade. If this condition is unfulfilled, the trading activity is subjected to restrictions and reductions similar to those of not answering the margin call, i.e. the trading activity is lowered to certain extents for an episode of 90 days. The restrictions will end if the customer deposits an adequate amount of $25,000 in the account. The options are either wait for 90 days or deposit a sum of the required amount. This round trip is continuous and is refreshed after every five business days.
These few are very important and must be followed regulations of Pattern Day Trading which is now a very popular trend amongst the people. If a person follows all the rules and carefully trades in the market, fair profits are bound to come.