Pattern Day Trader Rules were put in place to protect short term investors.
However, they stand in the way of many retail traders who are trying to grow their small trading accounts.
In this tutorial, I will step a step by step method on how to safely overcome the Pattern Day trader Rule so that we you can start taking your trading and investing to the Next Level.
Table of Contents
What is Pattern Day Trader Rule ?
FINRA Rule 4210 is the Pattern Day Trader Rule or PDT in short.
FINRA is the Financial Industry Regulatory Authority in the United States.
At its origin, the Pattern Day Trader Rule intent was to help prevent small investors and traders alike to blow their accounts over short period of time
Who is the Pattern Day Trader For ?
Nowadays with the increase of number of retail traders and volatility in the markets, The Pattern Day Trader Rule has become more of a hinderance than a safety net.
Let’s take a look at the Rule itself.
It is important to note that this Rule in strictly for Margin Accounts.
Your margin account needs to meet the following 3 conditions simultaneously.
- Your Execute more than three day trades in a 5 business day window
- Your Margin account is Less than $25,000
- The amount in day trades is greater than 6% of Total account activity
What Is a Round Trip Trade
This PDT rule is one of the most confusing concept for beginner traders.
Lets bring some clarity to the first point.
What is a Day trade ?
This concept of Day trade is often referred to as a round trip trade executed on the same day.
In means that if you buy to open a position and then sell to close that position on the same day then it is counted a 1 single round trip trade.
Conversely, you can start by selling to open a position and buying to close that same position.
This scenario counts as a day trades as well.
Now lets make it a little more complex.
Imagine you bought 5 JULY16 AAPL 140 CALLS.
That is 5 contracts for Apple 140 Calls expiring on JULY 2021. (third week expiration).
Now you make some money on this position and sell to close 3 contracts on the same day you bought the initial 5 contracts.
This results in one round trip trade.
Should you decide to sell to close another contract on that same day, now you number of day trades increases to 2 !
However, if you decide to hold on to those contract and sell them the next day or 2 days later, the counter of your number of Day trade will remain at 1.
Why Was The Pattern Day Trader Rule Put in Place
Therefore, we can see that as long as your margin account remains above $25000 you can day trade as much as you desire.
This arbitrary number of $25000 does not really align with the spirit of the PDT rule.
Imagine an inexperienced trader who starts with a hefty account balance over 25K, they are just as likely to blow while day trading as a a seasoned trader with a much smaller account.
What Happens When You Get Flagged with Pattern Day Trader Status
When a trading account meets the 3 PDT rule conditions, the broker will issue a Margin Call.
Typically, you will receive a message on your trading platfoem informing you of this condition.
Some brokers will even try to reach you to make sure you are aware of your account status.
I remember receiving such phone calls for the first time many years ago.
I can tell you by personal experience they can be quite intimidating.
One of the direct consequence of a margin call is that you cannot withdraw some of the money in your account for 2 days.
In case of an emergency, you will be unable to count on that money to resolve any immediate financial problem.
What Can You Do To Get Out of Pattern Day Trader Status
In order to bring your margin account into compliance, you have five business to add additional funds to meet the minimum equity.
To illustrate how much money you need to add, lets say your account started above $25000.
As a result of more than 3 day trades in 5 consecutives business day, your account drops to $24000.
Then, you will need to aa $250000 – $24000 = $1000 to get out of Pattern Day Trader Restrictions.
The amount to add is always the difference between $25000 and the current value of the account.
It should be noted that the funds can be Cash or any equity you may already own.
Do All brokers Enforce Pattern day Trader Rule
In the United States, all brokers must enforce the Pattern Day Trader Rule.
It has been my experience that the interpretation of the rule may sometimes vary from broker to broker.
My advice is to always ask for clarifications on what a broker will allow you to doin order to avoid any unnecessary surprise.
Pattern Day Trader Work Around in Robinhood
Robinhood traders are the ones who suffer the most from the PAttern Day Trader Rule.
I have witnessed stories from traders in our Discord room who could not take profit on big traders just because they will trigger a Pattern Day Trader Status.
Should you ever find yourself in this situation, please take the profit and deal with the consequences later.
And Here is why ?
The US markets have become so volatile nowadays with the whole meme Stocks Frenzy that you are not guarantee that profit you see at one instant will be there an hour later left alone they next day.
The likes of AMC, GME, SPCE have shown us recently the huge advantage of Day trading over numerous long tern strategies.
Bad Solutions To Overcome Pattern Day Trader Rule
One of the most popular method to workaround the Pattern Day Trader Rule is to have multiple accounts from different brokers.
By the way, do not try to set multiple accounts for this purpose at the same brokerage frim.
They will immediately flag it and let you know that that is not a practice they condomn.
With so many trading platforms in the USnowadays, it is relatively easy to setup multiple accounts.
How to workaround Pattern day Trader with multiple accounts
The idea of this mad technique is that you will have 3 days trade each five days multipled by the number of accounts.
So let’s say have account with Futu MooMoo, E*TRADE and Webull just to name these three we are very familiar with.
Consequently, you now have 3×3 = 9 day trade you can use on a weekly basis.
The challenge of this workaround is that you will need to deposit money in all these accounts.
I know a great deal of traders who use this setup and get by just fine while trying to grow their accounts to $25,000 and more.
You can just imagine the gymnastics you will have to go through in keeping track of how many round trip trades you are execucting in each account.
Though it is not impossible but you have to agree that this is rather a poor solution to the PDT rule.
Offshore Trading Account
Another recent technique to overcome PDT rule is to use an offshore trading account.
I do not know about you but I am very weary of such accounts because they do not provide the Financial security provided by the US Financial industry.
The last thing you want to be dealing with is spending wondering if your money is safe.
Trading is hard enough on its own to add this extra stress level.
Brokers with No Pattern Day Trader Rule
List of Offshore brokers you might be interested in.
Best Way To Workaround Pattern Day Trader Rule
We learned earlier that the Pattern Day Trader Rules regulates the use of margin accounts only.
A advantage of the margin account is that it increases your buying power significantly.
However, it is often forgotten that trading on margin can lead to you losing more money than you have.
Therefore, for beginner traders, I strongly recommend using a Cash account instead.
Cash Account vs Margin Account
Setting a Cash Only account precludes you from being subject to the Pattern Day Trader Rule.
It also removes the Risk of loosing more moneythat you put into your trading account.
You may or may not have read the horrible studies on some complex trades that have gone wrong and traders ended up owing hundred of thousands of dollars.
Avoid becoming the hero of such next story.
Here is our full detailed video on how to setup your trading account for beginner traders.
You may be wondering how you can trade in todays stock market without leveraging a margin acccount that usually can multiply your buying power by 3 or 4 times.
Here is our suggestion to help grow your account with very little Risk.
Grow Your Account with Proven Strategies
Option trading provides a great deal of leverage for small account traders.
You can start small while you re still learning and grow your account quite rapidly with our proven trading system.
Check out how many traders are taking advantage of our 10-Baggers Trading System.
The Pattern Day Trader Rule was explained in details with easy simples examples.
We explored the best ways to overcome this restriction for small account below $25000.
Now, I would like to encourage you to apply your learning from this article to help you Take your Trading to the NExt Level.