Pattern Day Trading
The SEC defines a day trade as any trade that is opened and closed within the same trading day. It can be a buy-to-open and a sell-to-close or a short sale closed by a buy order. If you do four or more day trades within five trading days, the SEC likely considers you a day trader. The only exception to this rule is if the total number of day trades is no more than 6% of your total trades in that timeframe. You are only considered a pattern day trader if four or more day trades make up more than 6% of your trading activity. However, unless you’re a very active swing trader, four day trades in a week will likely land you a designation as a pattern day trader.
Check Your Broker’s Specific Requirements
The SEC sets the bare minimum requirements for day traders in the U.S. Individual brokerage firms may have more stringent definitions, so it’s important to look up the details on what your brokerage expects of its pattern day traders. For instance, a broker may define pattern day trading as making two or three day trades in a five-day period instead of four. In other cases, a broker may count certain stock and ETF positions toward the minimum equity requirement, but it doesn’t count penny stocks or options. By looking up your brokerage’s exact requirements, you can avoid running into issues and keep your account active for day trading.
Suspended Trading
If a trader is classified as a pattern day trader—either by the SEC or at a broker’s discretion—they will be expected to maintain their equity balance requirements (at least $25,000). If a trader does not have the required $25,000 equity balance in their account, they will be prevented from making further day trades. Day trades will remain unavailable until the equity balance in the account is increased to $25,000. Day traders are only required to have the $25,000 balance on the days that they day trade.
Leverage or Margin
Day traders in the U.S. are allowed to use up to 4-to-1 leverage. That means that if a day trader deposits $30,000 in their account, they can accumulate positions up to $120,000. Traders who hold positions overnight are only allowed to use up to 2-to-1 leverage. Day traders are allowed to have more leverage, since their positions are short-term, and therefore, each trade is likely to experience smaller price swings than positions held for days, weeks, or years. If a trader exceeds their allowed margin (for example, if a losing position causes their deposited capital to drop), then they will be issued a margin call.
Alternatives to Minimum Equity Requirements
The $25,000 equity balance restriction applies only to U.S. stock markets. The day trading restrictions on other markets vary. The U.S. futures and currency markets don’t have set equity balance requirements for day trading, but brokers may set deposit minimums and margin requirements on each asset. The same goes for cryptocurrencies like Bitcoin. Day traders with less than $25,000 in capital will need to acquire more capital to day trade the stock market. Alternatively, they can participate in the futures, forex, or crypto markets, which are also viable day trading markets. While there aren’t legal requirements, a trader may want to ensure that they have at least $5,000 to $7,500 (preferably more) in starting capital before trading futures. For forex day trading, a trader may want to have at least $500 (but preferably $1,000 or more) in initial trading capital.
