What is Pattern Day Trading and how to handle it in AlgoCloud?
Trading stocks has its specifics, and one of them is Pattern Day Trading (PDT) rule. It is imposed by U.S. regulatory bodies like the SEC and FINRA and is mandatory for all US based brokers.
What is Pattern Day Trading?
According to FINRA rules, you are a day trader if you execute at least four day trades (trades that are open and closed at the same calendar day) within five business days.
Pattern Day Traders must maintain a minimum account balance of $25,000 in their margin accounts plus there are some margin requirements. This will allow them to engage in unlimited day trading.
Note – this pattern applies also to fractional stocks – you won’t avoid this by trading in fractions.
Check the Alpaca.Markets help for complete documentation: https://docs.alpaca.markets/docs/user-protection
What this means to you as a trader?
In short – if you have an account of less than $25,000 you must be aware of some trading limitations, so that you don’t trigger this pattern.
If you do trigger it – it will be automatically recognized by your broker – some of your orders will be refused and your trading will be limited.
This would create a difference between your real trading and your strategy backtests, so you should be extra careful to not trigger this pattern unless you have adequate capital.
Avoiding Pattern Day Trader in AlgoCloud
It looks complicated, but it really isn’t that bad. There is no problem trading a smaller account under $25,000.
There are strategies and their variations that don’t trigger the day trading pattern and so you are perfectly safe trading them without fear.
Remember – the pattern recognizes only day trades – trades must be opened and closed on the same calendar day.
AlgoCloud offers you a variety of entries and exits – to avoid the pattern simply use them smartly to never close the trade at the same day as it was opened.
All our strategy examples that don’t trigger PDT rule have a tag – you can see what kind of exits they use.
Other broker protections
Every broker is different, and some of them might have special requirements above what is required by the financial authorities.
There are also special margin requirements if you are recognized as a day trader (see PDT above). Please read about it in the broker documentation: