What counts as a day trade?

Can someone from Alpaca (maybe @Dan_Whitnable_Alpaca or @mahmoud_alpaca ) please confirm that my understanding of PDT is correct?

This is a hypothetical situation:

  1. I have less than $25k equity in my account.

  2. On Monday, I open a position in MSFT and then close that position later in the day. This counts as one day trade.

  3. On Tuesday, I open another position in MSFT and then close that position later in the day. I have now accumulated two day trades across two consecutive days.

  4. Also on Tuesday, I open a position in AAPL and then close that position later in the day. This is one a different day trade, so my PDT count is still 2.(INCORRECT)

  5. On Wednesday, I do not trade either MSFT or AAPL. My PDT count is still 2.

  6. On Thursday morning, I open and close a position in MSFT. My PDT count is now 3.

  7. On Thursday afternoon, I open another position in MSFT. My PDT count is now 4 (within 5 business days) and my account is now flagged for Pattern Day Trader.

  8. I attempt to close my MSFT position, but I cannot as the default setting is for the order to be rejected on exit. I know I can change this setting to be On Entry.**(INCORRECT)

  9. My account is now restricted to Liquidate Only and I must fund my account to bring it above $25,000 equity to lift the restriction.

  10. From now on, Alpaca/FINRA considers me to be a Pattern Day Trader and the PDT flag cannot be removed from my account.

Have I misunderstood anything?

“A day trade is defined as a round-trip pair of trades within the same day.”

“A buy must occur first and then a sell of the same security must come later in the day… Selling short and covering the short on the same day is also considered a day trade.”

“An account is designated as a Pattern Day Trader if it makes four (4) day trades within five (5) business days.”

“Alpaca…rejects a newly submitted order on exit of a position if it could potentially result in the account being flagged for PDT.”

Source: User Protections - Documentation | Alpaca

@maxks90 Very good question and thank you for putting the time into articulating it so thoroughly.

I’ll first address the definitions.

“A day trade is defined as a round-trip pair of trades within the same day.”
“A buy must occur first and then a sell of the same security must come later in the day… Selling short and covering the short on the same day is also considered a day trade.”

Correct. If one were to open (or increase) a position then close (or decrease) a position in the same day that is a “day trade”. Here are some examples

  • no current position in AAPL. buy 10 shares then sell 5 shares. 1 day trade
  • no current position in AAPL. buy 10 shares then sell 5 shares then sell remaining 5 shares. 1 day trade.
  • no current position in AAPL. sell short 10 shares then buy back 5 shares. 1 day trade
  • hold 100 shares long of AAPL. buy 10 shares then sell 5 shares. 1 day trade
  • hold 100 shares long of AAPL. sell 10 shares then buy 5 shares. 0 day trade
  • hold 100 shares short of AAPL. buy 10 shares then sell 5 shares. 0 day trade
  • no current position in AAPL. buy 10 shares then sell 5 shares buy 5 shares sell 10 shares. 2 day trades

“An account is designated as a Pattern Day Trader if it makes four (4) day trades within five (5) business days.”

Correct. There is a rolling 5 day window so any day trades made over 5 days ago are not counted.

“Alpaca…rejects a newly submitted order on exit of a position if it could potentially result in the account being flagged for PDT.”

Correct. However the order will only be rejected if the account equity is below $25,000. There is no restriction on the number of day trades if the account is over $25,000 (only restricted by the day trading buying power).

Now, circling back to the numbered sequence in the scenario.

Number 4 is incorrect. Buying and selling the same stock within the same day is always a day trade (even if previously traded). Therefore the day trade count on Tuesday would be 3 (not 2).

Number 6 and 7 are incorrect. The account executed a 4th day trade in the morning so the account would be flagged PDT at that point.

Number 8. If one has 3 day trades (within the past 5 days) AND the equity in the account is less than $25,000, then one would be restricted from closing a position which was opened that same day. That would create a 4th day trade within 5 days, the account would then be flagged PDT, and the account would be restricted from trading until the equity is above $25,000. To prevent this from happening (nobody wants to have their account restricted from trading) Alpaca has a protection in place which tries to prevent this and restricts closing that position. One can close other positions just so they do not create another day trade.

Additionally, it was stated I know I can change this setting to be On Entry . No. That is something completely different. The PDT protection is only applied to accounts under $25,000 and ALWAYS applied to exiting a position if it would create a day trade. The ‘on entry / on exit’ configuration is a separate check. That is a Day Trading Buying Power (DTBP) check which tries to prevent an account over $25,000 from exceeding it’s DTBP.

It’s true that once an account is designated PDT that will stay indefinitely on the account. There can be however a one time exception and this designation can be removed. Submit a request to support@alpaca.markets for this.

A couple things to consider. Effectively, if an account is under $25,000 then do not day trade. The 3 trades in 5 day rule is meant to be used in exception cases to exit a position. It’s not really meant to be part of an ongoing trading strategy. If an account is over $25,000 then day trades are fine. A PDT designation can be a good thing because with it one is allowed up to 4x intraday margin. However, unless you can guarantee that the account will always remain above $25,000 then you probably shouldn’t day trade there either.

Does that make things a bit clearer?

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Hi Dan,

Thanks for a great and detailed reply. I’m glad that I was mostly correct, but I clearly have a few misconceptions.

In my hypothetical example, I mentioned that I open and close a position in MSFT on Tuesday, but then I also open/close a position in AAPL on the same day. Your reply (above) mentions the “same stock”. As MSFT and AAPL are not the same stock, wouldn’t the AAPL position have no effect on my PDT count?

If different stocks count towards the same single PDT count, then my strategy has been completely nullified. I was hoping to create a day-trading bot that would simply not open a position in a stock if I had recently traded that stock (to avoid PDT), however it seems that the bot would have to pause all trading if any trade had been made recently. As my account equity will be nowhere near $25k for quite some time, this is a huge problem. Having said that, I fully appreciate that PDT rules are mandated by FINRA - not Alpaca. I’m not blaming you guys. Just trying to make sure I understand.

Ok, thanks for this. I understand it now.
Alpaca_DTBP_check_option
I saw this option in the dashboard and assumed it was the same thing. Thanks for clarifying.

Sorry @Dan_Whitnable_Alpaca - just a couple more questions!

1. If I were to open several positions on one day and then close them all on the next day, would they count as day trades? For example:

On Monday, I open positions in AAPL, MSFT, GOOG, and FB, hold them overnight, and then close all 4 positions on Tuesday.

2. What if I closed those positions during Monday after hours instead?

3. If I close all 4 positions on Tuesday morning and then open 4 new positions (AAPL, MSFT, GOOG, FB) on Tuesday afternoon, would those count as day trades?

Thanks, and sorry for all the questions!

@maxks90 I’ll try to answer …

  1. No, none of those trades are day trades. The opening trade was on the first day and the closing trade was on a separate day. The open and close were not on the same day.

  2. Yes, all would be day trades if then closed after hours. Day is considered to be calendar day.

  3. No, none of the Tuesday trades would be day trades. Those would be a close in the morning followed by an open in the afternoon. A day trade is defined as an ‘open’ followed by a ‘close’. The other way around (ie a ‘close’ and then an ‘open’) is not a day trade.

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Perfect, I thought this would be the case. Thank you so much, Dan! :+1:

Hi @Dan_Whitnable_Alpaca following up on this. I have more than 25k equity in my account but when I check the GET /accounts endpoint, I see that the daytrading_buying_power is 0. Does this mean that I can’t do any day trading or do I need to enable something separately?

What is your buying power when you log into the web dashboard? Is it different to what you see via the API? If so, your code is probably connecting to a different account. Make sure the keys match.

@Bo_Chen If one’s day trading buying power (DTBP) is $0 then one cannot (typically) day trade. This often happens if one has overnight holdings of leveraged ETFs.

However, there is a bit of a Catch-22. If an account is NOT flagged as Patern Day Trader (PDT) even if the equity is above $25,000, the DTBP will be $0. Why? Because technically, if an account is not flagged PDT, then it isn’t extended 4x leverage on day trades. One doesn’t get any extra day trade buying power which is why it will show $0. However, one can still execute day trades. If the account has less than $25,000 one can execute up to 3 day trades in a rolling 5 day window. If the account has more than $25,000 one can execute as many day trades as one wishes. Do note however in this case, if one goes over 3, then the account will forever be flagged PDT. If the account ever then drops below $25,000 then it will be restricted from trading until the equity goes back above $25,000. Getting an account designated PDT means a commitment to keeping the account equity forever above $25,000.

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