The pattern day trader (PDT) rule explained

What counts as a day trade

A day trade is buying and selling, or selling short and buying to cover, the same security on the same day in a margin account. Stocks, ETFs and options all count. A few consequences are easy to miss:

• A position held overnight and closed the next day, before any new purchase of the same security, is not a day trade.
• A position opened in the morning and closed by a stop-loss in the afternoon is a day trade, whether you closed it or a resting stop did. Automated strategies with intraday stops and targets can create day trades without anyone deciding to.
• Brokers can count scaled entries and exits differently, so check how yours treats a sequence such as two buys followed by one sell.

When an account becomes a pattern day trader

The test has three parts: four or more day trades, within five business days, in a margin account, provided those day trades are more than 6% of the account's total trades in the same period. For a small, active account the 6% condition is usually met. The window rolls forward one business day at a time; it is not a calendar week.

For example, an account that has not day traded recently:

The following Monday, the previous Monday's trade drops out of the window, but by then the account has been designated. A broker can also designate an account in advance if it has a reasonable basis to believe the customer will day trade. Investor.gov's definition of a pattern day trader is a useful short reference.

The $25,000 minimum and day-trading buying power

Once designated, the account must hold at least $25,000 of equity, meaning cash plus the value of securities, on any day it day trades, and that equity must be in the account before any day trading that day. Below $25,000, the account may not day trade until the equity is restored.

A pattern day trader may trade up to four times the account's maintenance margin excess as of the previous day's close; this is day-trading buying power. Exceeding it brings a day-trading margin call. The customer then has up to five business days to deposit funds, buying power is limited to two times maintenance margin excess until the call is met, and if it is not met in time the account is restricted to trading on a cash-available basis for 90 days or until the call is met. Funds deposited to meet the minimum or a call must stay in the account for at least two business days.

What happens if you are flagged

Being flagged is an account designation with requirements attached, not a fine. What it means in practice depends on equity:

• $25,000 or more: you can keep day trading within your day-trading buying power.
• Under $25,000: you cannot day trade until the equity is restored. Broker practice varies; some restrict the account for 90 days unless the equity is brought up to the minimum.

Cash accounts and margin accounts

The rule applies to margin accounts. A cash account cannot be designated a pattern day trader, but it has its own constraint: you can only trade with settled money. US stock trades settle one business day after the trade (T+1). Buying with unsettled sale proceeds and selling before those proceeds settle can be a good-faith violation, and paying for a purchase with the proceeds of selling that same position is free-riding under Regulation T. Either can lead to restrictions, such as 90 days of trading with settled cash only.

For example, with $10,000 of settled cash you can buy and sell $10,000 of stock on Monday, which is a day trade without PDT consequences in a cash account. The sale proceeds settle on Tuesday, so buying again with them on Monday and selling before they settle risks a violation.

A margin account gives flexibility, including short selling and immediate use of sale proceeds, at the cost of the PDT rule and of borrowing risk. Which suits you depends on how often you trade and how much equity you have.

How brokers enforce it

FINRA member brokers must apply the rule and may set stricter house rules, such as a higher minimum, a more conservative counting method or earlier designation. Many show a day-trade counter in their app. Some reject an order that would become a fourth day trade in a small margin account; others accept it and apply the designation afterwards. Either way, the broker's count is the one that applies, because it sees every trade in the account and uses the real exchange calendar.

Common misconceptions

• "It applies to every brokerage account." Only margin accounts; cash accounts are limited by settlement instead.
• "It means four trades a week." It means four day trades, which are same-day round trips, in any five business days. A purchase held overnight is not one.
• "Stops are exempt." A stop that closes a position opened the same day completes a day trade.
• "It covers anything I trade." It covers securities, so stocks, ETFs and options count, while spot crypto on a crypto exchange and spot FX do not; bitcoin and ether ETFs are securities and do count.

How PatternX's PDT guard works

PatternX includes a pattern day trader guard among its risk controls:

• On by default. You can switch it off, which does not change the rule.
• Scope: live securities trades on US margin brokers. Paper trades, crypto and FX are not part of the count.
• What it does: when account equity is under $25,000, it blocks the trade that would be the 4th same-day round trip within 5 business days.
• What it does not model: exchange holidays. In a week with a market holiday the real five-business-day window reaches one day further back than PatternX's, so your broker may still count a day trade that PatternX's window has already dropped.
• Whose count wins: the broker's. It covers every trade in the account, including any you place outside PatternX, so treat the guard as a safety net rather than as compliance.

With a small margin account, two alternatives are worth knowing: practise intraday ideas with paper trading, where nothing counts toward the rule, or hold trades overnight and accept the gap risk described in the stock chart pattern guide. PatternX's risk controls feature page lists the other limits that apply to stock trades, and the risk disclaimer explains the risks of trading in general.