What is the PDT rule and how does FINRA and SEC view it…
If you are looking to trade actively, this is one blog you will want to study in detail. If you do not plan on making more than a few trades a week, then you may not run into this issue. Nonetheless, PDT is something all traders and investors should understand and be aware of.
FINRA rules define a “pattern day trader” as any customer who executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent of the customer’s total trades in the margin account for that same five business day period. This rule represents a minimum requirement, and some broker-dealers use a slightly broader definition in determining whether a customer qualifies as a “pattern day trader.” Customers should contact their brokerage firms to determine whether their trading activities will cause them to be designated as pattern day traders.
A broker-dealer may also designate a customer as a “pattern day trader” if it “knows or has a reasonable basis to believe” that a customer will engage in pattern day trading. For example, if a customer’s broker-dealer provided day trading training to such customer before opening the account, the broker-dealer could designate that customer as a “pattern day trader.”
Under FINRA rules, customers who are deemed “pattern day traders” must have at least $25,000 in their accounts and can only trade in margin accounts. For more information on pattern day traders and related FINRA margin rules, please read the SEC staff’s investor bulletin “Margin Rules for Day Trading.” Source: https://www.sec.gov/files/daytrading.pdf
What does that mean if I have under $25,000 in my trading account?
You are allowed 3 day trades in a 5 day period, and you will not be marked as a pattern day trader unless you take more than the 3 trades per 5 trading days. For a beginner trader, this is ok! You can begin trading, you will just need to limit yourself to those 3 trades per week. By doing this, you should focus on the best possible trades you can take. Take advantage of the trades you are able to execute.
Pure Power Tip: Don’t hold your day trades on a pedestal! This means, you have to follow rules, don’t use the thought “I want to preserve my day trade so I am going to remove my stop mentality.” You must protect your risk, and have the buying power available for stronger opportunities. This is especially important when trading options.
Swing Trading is a great strategy to use when under the $25,000 PDT limit.
If you are new to trading, then you are surely going to encounter the Pattern Day Trader rule. This rule applies to traders in the United States; trading on an American based brokerage with an account balance under $25,000 in cash. If this is the case, you will be hindered by the PDT rule. This means you are only able to make 3 round trip trades within a rolling 5 day period.
Now what does that mean? A round trip trade is opening a position and closing a part of that full position. In this case, if you open and close a position on the same day, that is considered a round trip day trade.
If you make 3 of these within a rolling 5 day period, you will most likely have your account frozen for 90 days. Some brokers give you warnings and even have protections in place to ensure you do not make 3 round trip day trades in the 5 day period.
What if I don’t have $25,000, but want to day trade?
Luckily, there are ways around this rule even if you live in the United States. One option is using an offshore broker.
This is a broker that is not based in the United States, so it does not adhere to the same SEC (Securities & Exchange Commission) & FINRA (Financial Industry Regulatory Authority) policies & regulations.
Broker to Consider to avoid PDT Rule
Capital Markets Elite Group – https://www.cmelitegroup.com/ky
TradeZero – https://www.tradezero.co/
This is what the PDT section looks like in the popular Robinhood Trading App. You can see how they have a protection mechanism in place, as well as track your Day Trades to the date for you.
If you want to learn more about the PDT rule, you can visit the Wikipedia page.
If you still have questions about the Pattern Day Trader Rule, fill out the form below and we will get back to you as soon as possible!