Pattern Day Trader
Candlefocus EditorPattern Day Trader (PDT) is a Securities and Exchange Commission (SEC) term that designates a certain type of trader. To be considered a Pattern Day Trader, a trader must make at least four daytrades within a five day period. Once this new pattern is established, the trader is labeled as a Pattern Day Trader, and will be subject to additional regulatory scrutiny and limitations.
The United States government places a special emphasis on the activity of Pattern Day Traders. This is due to the fact that the trades are made more aggressively than those of a typical investor, and are therefore more risky. The more risky the investor, the more the government wants to protect them and make sure the proper safeguards are in place.
In addition to the additional scrutiny from the SEC, Pattern Day Traders must also meet certain requirements in order to remain legitimate and keep their accounts active. The most basic requirement for Pattern Day Traders is that they must maintain at least $25,000 in their margin accounts. This amount is the minimum that is required to be able to take up day trading, and is especially important to prevent a PDT from being over-leveraged. If the account balance falls below the $25,000 requirement, then the PDT will be prohibited from further day trades until the balance is brought back up above the minimum amount.
Pattern Day Traders must also use a margin account, in order to be able to make larger trades then they previously were. This is important, as it allows PDTs to take bigger risks and take advantage of larger swings in the market. Additionally, having a margin account allows traders to take advantage of lower day trading margin requirements.
In summary, Pattern Day Traders are subject to additional regulations and safety nets in order to safely take part in their activity. These regulations and requirements are intended to protect the traders from any risks involved with day trading and to ensure that the appropriate safeguards are in place. PDTs are required to maintain $25,000 in their margin accounts, as well as use a margin account to avail of the lower day trading margin requirements. By meeting these requirements, PDTs are able to take larger risks and enjoy the potential rewards that come along with day trading.