This lesson is gonna be a major bummer, but it’s better to find out now rather than the hard way (like I did). Essentially when you first start trading you can’t just buy and sell stocks all day long. Your broker will only allow you to do that three times in a work week before they “punish you” with the dreaded Pattern Day Trader Rule (PDT Rule).
TL;DR
- To day trade a lot, you must change your account into a margin account.
- You must put 25,000 dollars or more into the account.
- You must keep your total money and stocks above 25,000 dollars so you do not get blocked.
- A margin account lets you borrow up to half of what you own.
- When you short a stock, you are borrowing it, and that uses up part of that borrowing limit.
Rules No One Told You
If you trade stocks actively, you will run into a rule that stops a lot of beginners in their tracks: the Pattern Day Trader Rule (PDT Rule). Most people do not learn about it until it freezes their account and forces them to sit out for days. This was my first encounter with the rule:
What the PDT Rule Actually Is
The Pattern Day Trader Rule comes from FINRA. It says that if you make four or more round-trip day trades in a rolling five day period while using a margin account, you will be flagged as a Pattern Day Trader.
A day trade is a buy and a sell of the same stock on the same day.
Once flagged, your broker must require your account to maintain at least twenty five thousand dollars in equity at all times. Drop below that level and your broker can restrict your trading to only closing positions. This rule was designed to protect inexperienced traders from blowing up, but in practice it limits small accounts far more than it protects them.
Why the Number Is Twenty Five Thousand
Brokers do not pick this number. It is built into the rule. FINRA requires a minimum of $25,000 in a margin account if you want unlimited day trades. Think of it as a barrier to entry. If your account sits at twelve thousand, for example, you only get three day trades per rolling five day window. After the third, your account is locked until the window resets. Many new traders run into this because they do not realize each quick buy and sell counts as a day trade.
Reg T Explained
Regulation T, often called Reg T, is a Federal Reserve rule that governs how margin (shorting stocks, generally) works. It sets two things:
- Initial Margin
You can borrow up to 50 percent of a stock’s price when you open a position. If a stock costs one hundred dollars, you can open the position with fifty dollars of your own money and borrow the rest. - Settlement and Buying Power
Reg T also controls how much buying power you have in a margin account and how long trades must settle before your cash becomes usable again.
Most beginners do not know that using margin, even accidentally, can trigger PDT classification. Many brokers default accounts to margin by default unless you change them.
Margin Maintenance
Once you open a margin position, you need to maintain a certain level of equity or your broker can issue a margin call. This is called Maintenance Margin. If the value of your position drops and your equity falls below the required percentage, you must deposit more cash or close positions. This means your broker just starts selling off your stock without you even knowing it!
I logged on one day and someone had sold 20x shares of NVDA for $180. I had bought it for $200; violating this rule, that I had never heard of, cost me $400!
This affects new traders who overextend. They buy too much size, the stock pulls back, equity drops, and suddenly they owe money or lose their position without intending to.
How New Traders Get Burned
Most beginners fall into one of these traps:
- They use a margin account without realizing it, triggering PDT limits.
- They take more than three day trades in five days and get restricted.
- They overuse borrowed buying power and get a margin call.
- They assume cash settles instantly and run into “good faith violations.”
No broker sits you down and explains this. The warnings are usually buried in legal text during account creation.
How to Avoid These Pitfalls
Here is the simple way to protect yourself:
1. Use a Cash Account if Your Account Is Under 25,000
A cash account is the easiest way to avoid PDT. You can day trade as much as you want as long as the cash has settled. Stocks settle in two days. Options settle next day. No PDT rule applies to cash accounts.
2. If You Use a Margin Account, Track Your Day Trades
Many platforms show a counter so you do not accidentally hit four in five days. Use it.
3. Avoid Overusing Margin
Borrowed buying power feels great until the market moves against you. Start small.
4. Know Your Settlement Times
Plan your trades around when your cash becomes available again. This avoids good faith violations.
5. Keep a Buffer Above Twenty Five Thousand
If you are close to the threshold and the market pulls back, you can fall under the minimum and get restricted even if you did nothing wrong. People often keep a two thousand dollar buffer.
6. Read Your Broker’s Settings
Many brokers, including IBKR, open new accounts as margin by default. Change it if you want to avoid PDT.
The Bottom Line
The trading world has rules that can stop you cold if you do not know they exist. The twenty five thousand dollar barrier to entry is one of the biggest shockers for new traders. Understanding PDT, Reg T, and Maintenance Margin keeps you from stepping on the same landmines that catch thousands of beginners every year. Once you know the rules, you can work within them, build your account, and avoid unnecessary restrictions while you learn.