Pattern Day Trading

What is a Day Trade and Why Should I Care?

Simply put, we define a Day Trade as the purchase and sale of the same security on the same trading day. If you sell and then buy a security, or buy and then sell a security in the same day, you’ve executed one day trade (we've listed examples at the bottom of the page). Unless you have an equity balance of at least $25,000 in your account, your Robinhood Instant or Robinhood Gold account is limited to no more than three day trades in a sliding five trading day window.  Exceeding the three day trade limit will restrict your account from placing further day trades for 90 days.  This limit applies to margin accounts (Robinhood Instant and Robinhood Gold), but not to cash accounts.

Orders vs. Executions:

When you place an order, that order is matched against available buyers or sellers on the market in order to be filled.  Orders most often fill all at once - that is, a single buyer or seller matches the total number of shares requested to be bought or sold.  However, that’s not always the case – very large orders, or orders for thinly-traded securities, may have to be filled as separate, smaller buys or sells (called executions), in order to be filled.  For example, an order to buy 10,000 shares of XYZ may end up being split into separate orders:

Buy 1000 shares

Buy 2000 shares

Buy 3000 shares

Buy 1500 shares

Buy 2500 shares

Please note that each execution may be counted for the purpose of a day trade, so trading in particularly thinly-traded securities, or placing orders for abnormally large lots may increase your chances of getting a day trade.

What is Pattern Day Trade Protection?

Exceeding the day trade limit will cause your account to be flagged as a Pattern Day Trader, which will prevent you from placing any day trades for 90 days if your account balance is less than $25,000.

PDT protection is a warning and cannot guarantee the prevention of partial executions. If you try to make a fourth trade, you can still do so – we won’t block you - however, if you bypass PDT Protection and do not deposit enough funds to meet the $25,000 equity threshold, we will have to restrict your account from placing any day trades for the industry-mandated 90-day period. Unfortunately, we cannot make any exceptions to this rule.

It’s important to note that the Robinhood app will consider all the orders you’ve placed – not just executed - when our PDT Protection notifies you of a possible day trade. For example, if you’ve purchased a stock and then set a Sell Limit Order on that same stock in the same day, regardless of whether or not it gets executed, our PDT Protection will count that order as a day trade and notify you accordingly if it causes you to approach the threshold. However, if the trade does not execute, it will not count as a day trade.  Additionally, it is possible to trade through PDT Protection if an order you place fills through multiple executions instead of a single fill.  Please keep this in mind if you are placing orders for very large lots or thinly-traded securities.

We’ve designed our PDT Protection this way as an added precaution in the event that all of your placed trades do execute. This is also why we give you the option to override it and move forward with your trade. Please note that PDT Protection should be used as a guideline, as we do not guarantee that it will prevent you from being labeled a pattern day trader in every circumstance. The best way to avoid a restriction is always to keep track of your day trading activity.

Is my Buying Power the same as my Equity Balance?

Please keep in mind that if you use a Robinhood Instant account, any funds we’ve advanced to your account while awaiting a transfer will not count towards your $25,000 equity minimum threshold if your account is marked as a Pattern Day Trader. For example, if you’ve initiated a bank transfer of $1,000 that will arrive in your account in three days, your buying power will immediately increase by $1,000, the actual funds that count towards your overall equity (with regards to PDT) will not change until the funds are settled in three days’ time.

Why does it matter?

The Financial Industry Regulatory Authority (FINRA), has determined “The primary purpose of the day-trading margin rules is to require that certain levels of equity be deposited and maintained in day-trading accounts, and that these levels be sufficient to support the risks associated with day-trading activities.”  Annoying as they may be, Pattern Day Trading restrictions are an industry regulation and not something set by Robinhood.

How do I turn off Pattern Day Trade Protection?

And if you’d like to turn off our PDT Protection, you can do so at any time in the app by going to Account → Day Trade Settings:

 

Examples of Day Trades

One Day Trade

One Buy, One Sell

You start with 0 shares of ABC stock.

 

Buy 1 ABC

Sell 1 ABC

 

This is one day trade because you bought and sold ABC in the same trading day. This is a sequence of 1 buy and 1 sell of ABC.

Day Trades: (Buy 1 ABC, Sell 1 ABC)

 

Leading Sell

You start with 10 shares of ABC stock.

 

Sell 10 ABC

Buy 5 ABC

Sell 5 ABC

 

Because your first transaction for ABC stock was selling ABC that you held overnight, it doesn’t count toward your day trades. This is one day trade.

Day Trade: (Buy 5 ABC, Sell 5 ABC).

 

Non-Leading Sell

You start with 10 shares of ABC stock.

 

Buy 1 ABC

Sell 10 ABC

 

Despite already owning 10 shares of ABC, our system will look at this and say that you opened a new position in ABC with the initial purchase. This is one day trade.

Day Trade: (Buy 1 ABC, Sell 10 ABC)

 

Multiple Buys & Sells

You start with 0 shares of ABC stock.

 

Buy 1 ABC

Buy 2 ABC

Buy 7 ABC

Sell 1 ABC

Sell 5 ABC

Sell 4 ABC

 

This is one day trade because there is only one change in direction between buys and sells.

Day trade: (Buy 1 ABC, Buy 2 ABC, Buy 7 ABC, Sell 1 ABC)

 

Two Day Trades

2x Buy And Sell

You start with 0 shares of ABC stock.

 

Buy 50 ABC

Sell 15 ABC

Sell 35 ABC

Buy 10 ABC

Sell 10 ABC

 

This is two day trades because there are two changes in directions from buys to sells.

Day trade 1: (Buy 50 ABC, Sell 15 ABC, Sell 35 ABC)

Day trade 2: (Buy 10 ABC, Sell 10 ABC)

 

Selling More Than You Bought Intraday

You start with 10 shares of ABC stock.

 

Buy 10 ABC

Sell 20 ABC

Buy 1 ABC

 

This is a more complicated case and requires a little explanation.  This situation will count as two day trades because you opened by buying 10 shares of ABC stock and then sold more shares than you bought today.  When you open the day by buying 10 shares, the system disregards the 10 shares that you started with and reads it as opening a position of positive 10.  Selling 20 shares closes the intraday position of positive 10 and opens an intraday position with a value of negative 10.  The final purchase of 1 share is then considered a change in direction and thus a second day trade.

 

Day trade 1: (Buy 10 ABC, Sell 20 ABC)

Day trade 2: (Sell 20 ABC, Buy 1 ABC)

 

For more information about Pattern Day Trading, please visit:

http://www.sec.gov/investor/alerts/daytrading.pdf

http://www.sec.gov/answers/patterndaytrader.htm

 

 

 

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