Key Takeaways
- Pattern Day Traders get 4x buying power intraday, 2x overnight
- A 25% loss on a 4x leveraged position wipes out 100% of trader equity
- Margin calls must be met immediately or positions are force-liquidated
Understanding Margin in Day Trading
Client Question: "My broker says I have $100,000 in buying power but I only have $25,000. How does that work?"
Many day traders use margin to amplify their trading—borrowing money from their broker to take larger positions. This leverage is both the appeal and the danger.
Day Trading Buying Power
Pattern Day Traders have special margin provisions under FINRA Rule 4210:
| Account Type | Buying Power | Calculation |
|---|---|---|
| Regular margin (overnight) | 2x equity | Regulation T standard |
| PDT intraday | 4x maintenance margin excess | FINRA special provision |
Example: Leverage in Action
With $30,000 in equity:
| Position Type | Buying Power | Leverage |
|---|---|---|
| Day trading (intraday) | Up to $120,000 | 4x |
| Overnight positions | Up to $60,000 | 2x |
What $120,000 buying power means:
- You can control $120,000 in stock positions
- But you only have $30,000 of your own money at risk
- This is 4x leverage—gains AND losses are multiplied by 4
The Mathematics of Margin Risk
| Stock Move | Your Position | Your Loss | Equity Remaining |
|---|---|---|---|
| -5% | $120,000 | $6,000 (20% of equity) | $24,000 |
| -10% | $120,000 | $12,000 (40% of equity) | $18,000 |
| -20% | $120,000 | $24,000 (80% of equity) | $6,000 |
| -25% | $120,000 | $30,000 (100% of equity) | $0 |
A 25% stock decline wipes out 100% of your equity when using 4x leverage.
Margin Calls
If losses bring your equity below required levels:
| Event | Consequence | Timeline |
|---|---|---|
| Day trading margin call | Must deposit funds or liquidate | Immediate |
| Account falls below PDT minimum | Cannot day trade until $25,000 restored | Same day |
| Failure to meet call | Broker force-liquidates positions | Without warning |
Day Trading Buying Power Restriction
If you exceed your day trading buying power, serious consequences follow:
| Violation | Restriction |
|---|---|
| Day trading margin call issued | Buying power reduced to 2x (instead of 4x) |
| Call not met by deadline | Account restricted to cash-only trading |
| Duration | 90 days or until call is met |
Why Margin Is Particularly Dangerous for Day Traders
| Factor | Impact |
|---|---|
| Frequent trading | More opportunities to be wrong |
| Intraday volatility | Sharp moves can trigger margin calls quickly |
| Leverage amplification | Small mistakes become large losses |
| Emotional decisions | Losses trigger revenge trading (see Module 4) |
| Compounding costs | Transaction costs multiply with leverage |
The Force Liquidation Reality
Brokers have the right to liquidate positions without notice if margin requirements aren't met:
| What Happens | Client Control |
|---|---|
| Broker sells your positions | None—done automatically |
| Timing of sales | Broker decides, often at worst prices |
| Which positions sold | Broker decides, may not be your preference |
| Notification | May happen before you're aware |
Professional Framing
When clients don't understand margin risk:
"Day trading buying power can be up to 4x your equity—meaning with $25,000, you could control $100,000 in positions. But leverage works both ways. A 25% drop in your positions would wipe out 100% of your money. And if your account falls below requirements, your broker can liquidate positions without asking you—often at the worst possible time. The 4x leverage that makes day trading appealing is also what makes it so destructive when things go wrong."
A Pattern Day Trader has $40,000 in equity. What is their maximum intraday buying power?
A day trader using maximum 4x leverage experiences a 20% decline in their positions. What percentage of their equity is lost?