Actively trading securities can be exciting, especially when markets are volatile. But be aware that if you execute too many day trades for the same security in your margin account across too many consecutive sessions, you could be branded a "pattern day trader" and have permanent limits placed on your account.
Here's how it works.
Day trading is the purchasing and selling, or selling short and purchasing, of the same security on the same day within a margin account.1
Pattern Day Trader
If you make four or more day trades over the course of any five business days, and those trades account for more than 6% of your account activity over the period, your margin account will be flagged as a pattern day trader account. (Note that you can day trade in a cash account.)
If this happens, even inadvertently, you'll be required to maintain a minimum balance of $25,000 in the flagged account—on a permanent basis. If you're short of the minimum at the close of any business day, you’ll be limited on the following day to making liquidating trades only.
The Financial Industry Regulatory Authority (FINRA) created the pattern day trader designation after the tech bubble popped back in the early 2000's, with the goal of holding active traders to higher standards than those who trade less frequently.
If you don't want to hold $25,000 in your account at all times, pay close attention to your trades to make sure you don't end up with a flagged account. That said, Schwab does allow a one-time exception to clients who may have been flagged as day traders, so long as they commit to not doing so again.
Day trading at Schwab
If you want to be a day trader, then the $25,000 minimum balance requirement will apply to your account at all times. To help traders keep track of their balances, Schwab displays a feature called Day Trade Buying Power (DTBP), which represents the amount of marginable stock that you can day trade in a margin account without incurring a day trade margin call.
DTBP is displayed under the Margin Buying Power in the Balances section of our platforms.
Each day’s maximum DTBP is determined by the prior night's market close. If you exceed your DTBP, a day trade margin call will be issued for the deficiency.
- The call is due in five business days and can be met by making a deposit, journal or transfer of funds, journal or transfer of marginable stock, or sale of long options or non-margined securities.
- Funds deposited to meet a day trade margin or minimum equity call must remain in the account for a minimum of deposit day plus two business days.
If you don't have an outstanding day trade margin call, your DTBP will update throughout the day as you execute trades—falling with opening trades and rising with closed day trades.
If you do have an outstanding day trade margin call, your DTBP will fall with each opening transaction during the day, but you won’t be credited when transactions close.
A few other things to note:
- Orders for leveraged ETFs reduce DTBP by an amount equal to the cost of the order multiplied by the leverage factor of that particular ETF. For example, if you place a $10,000 order for a 3x leveraged ETF, your DTBP will shrink by $30,000.
- Trades with non-marginable securities are subject to cash account rules, not margin account rules, meaning you can day trade in your margin account without fear of being flagged as a pattern day trader.
- Short Sales of non-marginable securities will reduce the DTBP by an amount equal to the cost of the order multiplied by four.
The bottom line
Having restrictions placed on your account because of pattern day trader rules isn't ideal. If you want to be a more active trader, or occasionally do a little day trading, be sure to keep tabs on all the applicable limits. Otherwise, if you can steer clear of violating the rules, and keep your account value well over $25,000, there will be no restrictions should you need to execute a short-term trade.
1Exceptions include a long security position (holder owns the security) held overnight and then sold the next day prior to any new purchase of the same security, or a short security position (sale of security borrowed from Schwab) held overnight and then repurchased the next day prior to any new sale of the same security.