The Pattern Day Trader Rule (otherwise known as Rule 2520) is a FINRA rule that imposes certain rules and requirements on stock traders classified as “pattern day traders.” The Pattern Day Trader Rule defines a pattern day trader as a trader who executes at least four day trades in any five consecutive business day period, provided the number of day trades is more than 6% of the total trades in the account during that period. Traders who are labeled pattern day traders must maintain at least $25,000 in their account on any day that they place a day trade. The rule applies only to customers in margin accounts and not to customers in cash accounts.
What Happens If The Minimum Equity Requirement Is Not Met
If a pattern day trader falls below the $25,000 minimum equity requirement, he will be issued a margin call and have to up to five business days to restore his account to the $25,000 minimum equity requirement. If the margin call is not met by the fifth business day, the account will be restricted to trading on a cash basis only for 90 days or until the margin call is met.
History Of The Pattern Day Trader Rule
The Pattern Day Trader Rule was enacted in 2001 during the precipitous collapse of the Internet- fueled stock market bubble. During the bull market, it seemed like everybody was getting rich day trading the wild gyrations of Internet stocks, with numerous stories of people quitting their jobs to pursue day trading. When the bubble finally burst, however, and many of these so-called “expert” day traders got wiped out, the SEC decided that it needed to step in to regulate day trading in an effort to protect investors from themselves. Thus, the Pattern Day Trader Rule was born.
How To Avoid The Pattern Day Trader Rule
The easiest way to avoid having to deal with the Pattern Day Trader Rule and the $25,000 minimum account requirement is simply to work at a proprietary trading firm. Traders who are trading a prop firm’s capital aren’t subject to the Pattern Day Trader Rule, which is one of the many benefits of working at a prop firm. If you want to day trade stocks but don’t have $25,000 in your trading account, my advice would be to seek out a reputable prop firm so you can bypass the Pattern Day Trader Rule.
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