@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 firstname.lastname@example.org 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?