This type of trader represents a person who is making more than 4 trades during the business week by using a special account. Also, there is a special rule that states that this type of trader must always have a minimum of $25,000 of funds. This type of trading is related to people who are more active on the market, and those who are buying and selling stocks during the same trading day.
The main issue is that a lot of people are not sure about how this system works in practice, and are you really obliged to follow the rules related to limitations and minimum funds that you need to have on your account. You should visit thedaytraderchatroom.com to learn more about this topic.
The main feature of pattern trading is that there are certain limitations on these accounts. In case that a trader makes more than 4 actions during the same week, the account will be marked as a pattern. Also, you will have to maintain the position at 25,000 dollars, and if the sum goes below that amount, you will be restricted from further actions. In this article, we are going to introduce you to the main rules related to trading accounts marked as PDT.
This model of day trading is the same when it comes to units that you can buy and sell. However, the trader must follow certain rules. First of all, they will need to avoid the issue where the amount of money on the account is below the determined value. If that happens, you will face a margin call. You will have five business days to resolve this issue. If you don’t manage to do that, your account will be blocked for three months or until you resolve the problem.
When it comes to day trading, you have to understand its main features. A trade is considered to be a “Day Trade” if the process of buying and selling is made during the same business day. Therefore, if you buy units during the one day and sell it after it stays on your account at least for one whole day, you should not worry about being marked as PDT. In most cases, this model is applied to stocks, bonds, and similar units. On the other side, you can freely trade with futures and forex.
There are many misconceptions related to this system of trading. A lot of people think that the main reason is to prevent traders from making more profit. However, the real reason for including such a system was to help people to avoid financial issues that could occur due to excessive trades. There are some benefits from being labeled as a pattern trader. You will have a chance to earn even more money because the ratio of funds you can get from leverage is 4 to 1 instead of 2 to 1 on standard cash accounts.
How it Works?
First of all, you have to know that this rule does not mean that you will need to limit your actions to less than 4 days per week. You can trade as much as you want, but attention to hold the units for more than one day to avoid the rules related to pattern trading. On the other side, limiting yourself to only four or fewer daily trades where you will buy and sell some units over a short period during the same day can be a great way to make a profit.
The market is highly volatile, and we can notice that prices will almost always start increasing after the first 15 minutes on each trading day. However, it requires proper research of the market to determine the right units that will secure you with profit. Also, it is great for beginners to use this limit since being more active can lead to financial issues due to a lack of knowledge and experience.
As we already mentioned, you can get a 4 to 1 ratio in credentials when you have this type of account. For example, if you have $50,000 in funds, you can buy units for up to $250,000 in value. In case that the value of assets on your account grows by only 1%, you will gain $2,500 in profit. On the other side, the main issue is if you choose assets with negative trends. That might lead to serious financial issues over time. Still, the limitations are an excellent way to prevent yourself from making bigger mistakes.
If you want to avoid getting marked as a pattern trader, you should lead the rules and avoid spending more than 6% of your assets on daily trades. It is crucial to keep in mind that you can still make a lot of trades every day, but it is important to avoid buying and selling the same units more often. Also, it should not be an issue in the case that your account is recently marked as a patterned one. If you want to change it back, you can do that by contacting the broker.
The Bottom Line
If your account recently got changed into a patterned one, it is crucial to be aware of all the rules. Also, we suggest you avoid using the leverage funds. Besides that, try to limit yourself to making only three or fewer daily trades each week. Be aware that most stocks won’t be giving you a very high profit. Therefore, always focus on good research of the market. Set some limits according to your financial situation.
Like with any other model of trading, the most important is to analyze the market and try to determine the best options for investments, along with the right moment for selling the units. The most popular option for avoiding these requirements is to create several accounts. Also, you can use a cash account as well, or trade on different markets if you want to be more active every day and avoid issues related to pattern trading.