A pattern day trader is a person who buys and sells the same security (or securities) multiple times in a five-day period. The US Securities and Exchange Commission (SEC) has rules in place that restrict the activities of pattern day traders in order to protect investors.

Under the SEC's rules, a person is considered a pattern day trader if they meet the following criteria:

  • They execute four or more day trades within a five-day period. A day trade is defined as the purchase and sale of the same security (or securities) on the same day.

  • Their day-trading activities make up more than 6% of their total trades in a margin account during the five-day period.

  • If a person meets these criteria, they are considered a pattern day trader and must abide by the rules and regulations that apply to this type of trader. This includes maintaining a minimum account balance of $25,000 and using a margin account for their trading activities.

If your margin account holds more than USD $25,000, you are not considered a Pattern Day Trader. If your account holds less than USD 25,000, then you are limited to three-day trades in a period of five business days.

Should you not be familiar with the term, “margin” is the leverage your broker gives you to trade with. For example, if your leverage is 4:1 and you have USD 25,000 in your account, your buying power to trade with is USD 100,000. It is important to remember though that margin is like a double-edged sword, it allows you to buy more but it also exposes you to more risk.

More information.