What is the PDT Rule?
The PDT rule is one that you either love or hate. Some people love this rule because it forces them to be picky and take only high-quality trades. Others hate it due to the fact that they want to take smaller and more consistent trades. It all comes down to your trading style.
But many beginners are not aware of the PDT rule when they start trading. So today we are breaking it down for you and the options you have when it comes to this rule.
What is the PDT Rule?
The Pattern Day Trader (PDT) rule is a designation from the SEC that is given to traders who make 4 or more day trades within a 5 business day period.
If you use a day trade on Monday you will get that day trade back the following Monday.
A day trade occurs when you purchase/short a security then sell or cover that same security within the same day.
A single day trade can be buying once and selling once, buying once and selling multiple times, or buying multiple times and selling once.
If you make more than 3 day trades within 5 days, your brokerage account will be marked as a Pattern Day Trader and your account will be frozen for 90 days.
How Can I Avoid It?
You can avoid the PDT rule in 3 different ways.
The first is by having more than $25,000 in your account. The PDT rule does not apply to those with more than $25,000 in their account, but if you fall below this threshold your account can be marked.
You can also avoid this rule by having a cash account. A cash account will allow you to day trade with as much capital as you have available in your account. These funds typically become available to trade again in 1 to 2 days.
The third way you can avoid the PDT rule is by using multiple accounts. Each account you have will be allowed 3 day trades. If you have 2 accounts, you can make 3 day trades in each for a total of 6 trades per 5 day period.
In conclusion…
The PDT rule is for margin accounts under $25,000. If you perform more than 3 day trades in a 5 day period then your account will be restricted for 90 days.
The 3 ways to get around the PDT rule are as follows:
- Have more than $25,000 in your account.
- Use a cash account
- Use multiple accounts
Do you prefer having the PDT rule there to keep you focused on bigger quality trades or would you rather have a way around it? Let us know below in the comments!
