Pattern Day Trading: Definition, Rules & Requirements

Pattern day trading is a type of trading that is utilized by individuals who wish to take short-term trades that are closed out in the same day that they are opened. The SEC has a special designation for individuals that engage in this type of activity. In order to be classified as a pattern day trader, you have to trade the same security at least 4 times per day over a period of 5 days. If the amount of same day trades for that 5 day period is over six percent of your total activity, then you would be classified as a pattern day trader. Pattern day trading is a very high risk activity that has been known to produce large losses.

If you are in this category, you have to abide by specific rules that are set up by the SEC. First of all, you have to keep at least $25,000 in your trading account. This is designed to make sure that you have enough money on hand to absorb the large losses that could occur as a result of day trading. Secondly, you also have to trade using a margin account with your stock broker.