What is the Pattern Day Trader Rule? Definition, Formula, and Example
The Pattern Day Trader (PDT) rule is a FINRA regulation requiring any margin account that executes four or more day trades within five business days to maintain a minimum equity of $25,000.
What is the Pattern Day Trader Rule?
The Pattern Day Trader (PDT) rule is a FINRA regulation requiring any margin account that executes four or more day trades within a rolling five-business-day period to maintain a minimum account equity of $25,000. A day trade is defined as the purchase and subsequent sale — or short sale and subsequent purchase — of the same security on the same trading day within a margin account. Once an account is flagged as a PDT account, it must maintain $25,000 in equity or it is restricted to closing transactions only.
The Exact Threshold
The PDT designation triggers when both conditions are met simultaneously:
1. The account executes four or more day trades within any rolling five-business-day window, and
2. Those day trades represent more than 6% of total trading activity in that same five-day window.
The 6% carve-out means an account that executes dozens of trades per day and happens to day-trade four times is not automatically flagged — but for most retail traders executing fewer than 70 total transactions per week, four day trades will exceed 6% and trigger the PDT designation.
Once flagged, if account equity drops below $25,000, the broker restricts the account to closing trades only until equity is restored above the threshold. Depositing $25,000 in cash lifts the restriction immediately.
Worked Example
A trader holds a $22,000 Robinhood margin account and executes the following:
- Monday: Buys and sells TSLA intraday (Day Trade 1)
- Tuesday: Buys and sells NVDA intraday (Day Trade 2)
- Wednesday: Buys and sells AMZN intraday (Day Trade 3)
- Thursday: Buys and sells AAPL intraday (Day Trade 4)
On Thursday's fourth day trade, the broker automatically flags the account as a PDT account. Since account equity ($22,000) is below $25,000, the account is immediately restricted to closing-only transactions. The trader cannot open new positions until depositing an additional $3,000 or the 90-day restriction period expires.
Common Workarounds
Cash accounts: The PDT rule applies exclusively to margin accounts. Cash accounts have no day trade limit but face T+1 settlement constraints — proceeds from a sale are not available to trade again until the next business day, limiting round-trip capital efficiency.
Multiple brokers: Each broker tracks day trades independently against its own account. Distributing activity across two accounts at separate brokers is legal, though operationally complex.
Futures trading: Equity futures (ES, NQ, MES, MNQ) and other futures contracts are not subject to PDT rules. A trader can day-trade futures with a $500 account with no restriction. Futures margin requirements are set by exchanges, not FINRA.
Offshore brokers: Some retail traders use non-US brokers not subject to FINRA regulations. These accounts carry different regulatory protections and risks.
Why the Rule Exists
FINRA adopted the PDT rule in 2001 following the dot-com bubble collapse, during which retail traders using margin accounts incurred catastrophic losses through rapid short-term speculation. The $25,000 threshold was set to ensure day traders have a capital cushion to absorb intraday margin fluctuations. The threshold has never been adjusted for inflation — $25,000 in 2001 is equivalent to approximately $44,000 in 2026 purchasing power.
Limitations and Common Misconceptions
The rule applies per broker account, not per person — an individual with two separate margin accounts can day-trade from each without either triggering PDT status (assuming each independently stays under four day trades in five days).
Opening and closing a multi-leg options spread counts as one day trade if all legs are opened and closed on the same day. A two-leg spread opened and closed intraday is one day trade, not two or four.
The $25,000 requirement is a *minimum equity* threshold, not a deposit requirement — existing long positions at market value count toward the $25,000 balance.