A pattern day trader is a name that brokers give to investors who complete more than four day trades using a single account in the span of five business days, according to FINRA (Financial Industry Regulatory Authority). Trades can't be more than six percent of a person's total trades in the margin account.
According to NerdWallet, these kinds of trades usually occur within a single day's time. The trade can take place at any time on the market.
Trades have to be in pairs to count as a day trade. For example, buying 300 shares at one time but selling them in three separate transactions at the end of the day is only one day trade. The opposite is also true in terms of buying multiple sets of shares separately and selling them all at once.
Someone may also be labeled as a pattern day trader if their brokerage has reason to believe that they are one. According to FINRA, if a brokerage gives a person day trading training before opening an account with them, that person may be designated as a pattern day trader.
Pattern day trading isn't illegal, but it's risky
While pattern day trading isn't illegal, it can be very risky. As a result, the U.S. government has implemented rules to help keep trading regulated. FINRA is a government organization that Congress put in place to protect American investors.
While FINRA is a government agency, it can't and won't arrest someone for engaging in pattern day trading. FINRA is a not-for-profit organization and has no power to arrest someone even if day trading was illegal.
What happens when you get flagged as a pattern day trader
If someone is flagged as a pattern day trader their accounts are looked at more closely than before and they are required to abide by pattern day trading rules. According to FINRA, a pattern day trader is required to have a minimum equity of $25,000 in their margin account.
In order to start day trading again, the $25,000 amount must be in their account beforehand. Other rules include responding to any margin calls and not using cross-guarantees to meet those requirements. If someone fails to comply, they will face more restrictions.
How to stop being a pattern day trader
To stop being a pattern day trader, a person must not day trade for 90 days or three months. According to TD Ameritrade, if the requirement is met, the flag is lifted.
Pattern day traders face restrictions on Robinhood
On Robinhood, the definition of a pattern day trader is basically the same except for how days are counted. In the market, day trades only count on business days. In contrast, Robinhood specifies that any five day period counts as a trading day.
Pattern day traders on Robinhood face restrictions on their accounts including not being able to day trade for the 90 day period. To be able to day trade again, a user's portfolio must have a value of $25,000 minus any cryptocurrency.