The Pattern Day Trader (PDT) rule is a regulation imposed by the U.S. Securities and Exchange Commission (SEC) that applies to traders in the United States. According to this rule, an individual is deemed a Pattern Day Trader if they execute four or more day trades within a rolling five-business-day period in a margin account. A day trade constitutes the opening and closing of a position in the same trading day.
Once someone is classified as a Pattern Day Trader, they must maintain a minimum account equity of $25,000 in order to actively engage in day trading. If the account equity falls below this threshold, the trader is restricted from executing any further day trades until they bring the equity back above $25,000.
This rule was put in place to protect retail traders from the potential risks associated with high-frequency day trading, as it requires a certain level of account balance to participate. The SEC believes that traders with larger account balances are more likely to handle the risks associated with day trading.