Pattern day trading rule explained

The pattern day trader rule

The pattern day trader rule is a regulation set by the Financial Industry Regulatory Authority (FINRA), a trading governing body in the US, ‘to discourage people from trading excessively’. The rule requires traders to have at least $25,000 in their margin trading accounts on any given day, in order to reduce their risk.

Does the pattern day trader rule apply in the UK?

The short answer is no – the pattern day trader rule does not apply in the UK. If your trading broker is not regulated by FINRA – ie it is regulated by an authority outside of the US – you will not be bound by the pattern day trader rule.

IG is regulated by the UK’s Financial Conduct Authority (FCA), which means the rule will not apply when opening a position with us.

Pattern day trading basics

Pattern day trading (PDT) is the act of buying and selling the same financial market, such as forex or shares, on the same day, on the same margin trading account. To be considered a pattern day trader, you must be using an account that’s regulated by FINRA in the US, and execute more than four day trades on your margin account in a five-day period.

When you trade with a margin account, you trade using leverage. This means you can open a position with a deposit and still get exposure to the full value of the trade. Trading on margin will magnify your profits, but it will also amplify any losses.

If you execute fewer than four day trades in five days, then you’re still a day trader – just not a pattern day trader. These trades must also comprise more than 6% of the total trades on your account.

Learn about different trading styles

Pattern day trading can be a time-intensive activity, which means you’ll have to check market prices and news regularly. You should rely on thorough technical analysis to help you identify signals to open and close trades. You can also use fundamental analysis to prepare for upcoming economic events that may cause volatility in the market.

How can you start day trading in the UK?

1. Research which markets you can day trade in the UK
2. Decide on a day trading strategy
3. Open a live account to start trading, or build your confidence with an IG demo account

Get more details on how to start day trading

Pattern day trading example

Let’s say you thought that Apple shares (AAPL) were about to increase in value, so you decide to go long on 50 shares at $310. Before the end of the trading day, you close your position when shares reach $325. The next day, you go short at a price of $321 and close a few hours later at $330. On the third trading day, you go long again at $322 a share and close at $332 before the end of the trading day.

You’re making a profit, so you continue this behaviour for five days, opening and closing long and short trades, on the same trading period, on the same margin trading account. In doing so, you become a pattern day trader.

Remember, if you held your positions overnight instead of closing them the same day, you would not be considered a pattern day trader.

Start trading with a live IG account or try our risk-free demo account.