Pattern day trading rule explained
Many traders repeatedly buy and sell assets that could offer same-day profits. These people are called pattern day traders (PDTs). Here, we explore the basics of the pattern day trading rule and explain what it means to be a PDT.
The pattern day trader rule
The pattern day trader rule is a regulation set by the Financial Industry Regulatory Authority (FINRA) — a trading governing body in the US — to discourage excessive trading. The rule requires traders to have at least $25,000 in their margin trading accounts on any given day in order to reduce their risk.
Does the pattern day trader rule apply in the UK?
We're regulated by the UK's Financial Conduct Authority (FCA), which means the rule won't apply when opening a position with us through a spread betting, CFD trading or share dealing account, or Smart Portfolios.
However, when you trade through our US options and futures margin accounts, the PDT rule does apply. This is because Apex — which clears all US options and futures account trades — is regulated by FINRA.
Pattern day trading basics
Pattern day trading (PDT) is the act of buying and selling the same financial market — such as forex or shares — on the same day, on the same margin trading account. To be considered a pattern day trader, you must be using an account regulated by FINRA in the US and execute more than four day trades on your margin account in a five-day period.
With us, when you trade using our US options and futures margin account, you are subject to the PDT rule. However, this doesn't apply on our other accounts.
When you trade with a margin account, you trade using leverage. This means you can open a position with a deposit and still get exposure to the full value of the trade — trading on margin will magnify your profits, but it will also amplify any losses.
If you execute fewer than four day trades in five days, you're still a day trader — just not a pattern day trader. These trades must also comprise more than 6% of the total trades on your account.
Pattern day trading can be a time-intensive activity, which means you'll have to check market prices and news regularly. You should rely on thorough technical analysis to help you identify signals to open and close trades. You can also use fundamental analysis to prepare for upcoming economic events that may cause volatility in the market.
Start day trading with us
Spread bets, CFDs — no PDT rule applies.
How can you start day trading in the UK?
- Research which markets you can day trade in the UK
- Decide on a day trading strategy
- Open a live account to start trading, or build your confidence with an IG demo account
For more detail on how to start day trading, see our trading for beginners guide and forex day trading strategies guide.
Pattern day trading example
Let's say you thought that Apple shares (AAPL) were about to increase in value, so you decide to go long on 50 shares at $210. Before the end of the trading day, you close your position when shares reach $218. The next day, you go short at a price of $215 and close a few hours later at $222. On the third trading day, you go long again at $213 a share and close at $221 before the end of the trading day. You're making a profit, so you continue this behaviour for five days, opening and closing long and short trades on the same trading period on the same margin trading account. In doing so, you become a pattern day trader.
Remember, if you held your positions overnight instead of closing them the same day, you would not be considered a pattern day trader.
Ready to start day trading?
Important to know
This information has been prepared by IG, a trading name of IG Markets Limited. In addition to the disclaimer below, the material on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it. It has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer and quarterly summary.
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