Before you can figure out how to work around the pattern day trader (PDT) rule, you need to understand what it is and if you’re affected. Once you do, we’ll walk you through several different ways you can get around it without using an offshore broker.
- What is the PDT Rule?
- Who is Considered To Be a Pattern Day Trader?
- Is Pattern Day Trading Illegal?
- Can’t I Use an Offshore Broker?
- Is There An Easy Workaround?
- But I Really Need to Get Around the PDT Rule…
- Multiple Accounts with Different Brokers
- Go For A Longer Holding Period
- Work With a Day Trading Firm
- Look at Less Regulated Markets
- Expand Your Horizons
- The PDT Rule Isn’t A Scourge!
What is the PDT Rule?
Established by FINRA (the Financial Industry Regulatory Authority) and the U.S. SEC (Securities and Exchange Commission) in 2001, this rule is often misunderstood by beginner traders.
The PDT rule requires traders who want to trade more than 3 times in a rolling 5-day period to maintain a minimum balance of $25,000 in their margin accounts. Should the balance fall below the $25,000 mark, a trader will no longer be able to execute any day trades.
Who is Considered To Be a Pattern Day Trader?
According to FINRA, a pattern day trader is anyone who:
- uses a margin account
- executes at least 4-day trades within 5 rolling days in a margin account
- has his day trades forming more than 6% of his total trading activity for the same 5 rolling days.
FINRA also notes that your brokerage firm may designate you a pattern day trader if it has a reasonable basis to believe that you are a pattern day trader. For example, you may have received training from the broker on pattern-day trading before opening your account.
Is Pattern Day Trading Illegal?
Most definitely not, but it is regulated. It simply means that you have to keep the balance in your margin account at $25,000 or above. It can be cash, securities, or a combination of the two.
Should your balance fall below the minimum, you’ll get a warning message from your broker. Your trading account will be suspended until you bring your margin balance back up to $25,000.
Can’t I Use an Offshore Broker?
Much as the PDT was designed as a protective measure, many traders find the restrictions frustrating. Using offshore traders may seem attractive, but think carefully before going down this road. There are cases where it can work, but more on this a bit later on.
Not all offshore brokers are dishonest, but it can be hard to tell which is which. And there are other risks involved in using an offshore broker, the biggest one being currency risk. Forex Fraud talks about the pros and cons of this venture.
Is There An Easy Workaround?
Before you start looking for ways to go around the PDT rule, consider simply following it. Timothy Sykes, self-made millionaire and penny stock trader, suggests simply practicing restraint.
“It’s tough to watch the market sometimes and not trade. … Practice restraint. You won’t last long in the market without self-control.” To that end, here are the simplest possible strategies:
Leverage Is Not Your Best Friend
Using leverage can be a scary quick way to lose all your money. No margin account means less risk AND no PDT rule. The PDT rule only applies to margin accounts, not cash.
Yes, if you rely on cash-only, your profits will be smaller. But, especially if you are a newbie, just use a cash account and focus on only the best setups. Save the leverage for when you can handle it.
Stick to Maximum Three Day Trades Per Week
It’s so easy to overtrade. Forcing, chasing, or ‘revenging’ trades is only going to get you into trouble anyway. Exercise self-control and play it smart.
Instead of risking all your money, you can execute fewer trades. Ignore everything but the best setups. It is a great way to gain experience without potentially losing all your capital.
Consider Trading in Futures
Futures contracts allow a trader to lock in the price of the underlying commodity or asset. You are bound to buying or selling an asset in the future at a predetermined price and date. Visit Investopedia for a look at the pros and cons of futures.
The beauty of it is that the PDT rule does not apply to futures trading. You can trade them to your heart’s content, even if you have less than $25,000 on your margin account.
But I Really Need to Get Around the PDT Rule…
If you’re just not content with the restrictions the PDT rule places on you, there are other options to work with. They come with their pitfalls, though, so consider each one carefully before going for it.
To get a handle on the PDT rule and day trading in general, check out the free video lessons from Investors Underground. This comprehensive, easy-to-understand tutorial covers all the crucial aspects of PDT and the safest ways to circumvent it, should you choose to do so.
Meantime, here are a few ideas on what you can do to work around the PDT rule.
Multiple Accounts with Different Brokers
Remember, the PDT rule defines a pattern day trader as someone who makes at least three-day trades in five rolling days. Using different brokers circumvents this by allowing each account to function independently.
There are other good reasons you may want to have accounts with several brokers, writes Alice Holbrook for nerdwallet.com. But do keep in mind that it can be cumbersome, leading to trading inefficiencies.
Go For A Longer Holding Period
Short-term volatility in the market is not necessarily indicative of a long-term trend. A longer holding period isn’t a bad thing. Commission charges eat up a fair portion of profits, so increasing your investment timeframe will reduce your costs.
And, as long as you hold your trading positions overnight, you’ve worked around the PDT rule. Your trades become intra-day as opposed to same-day. It means that you can trade even if you have less than $25,000 on your margin account.
Work With a Day Trading Firm
While not an option for everyone, if you’re highly skilled, you can try this one. In this setup, the company finances your positions, and you receive a percentage of the profits.
There will be a lot of pressure on you to perform, and a day trading firm won’t take you on unless you can convince them you’re worth it. But if you believe you have what it takes and want to make it big-time, give it a shot.
You can read up on what it takes to be a proprietary day trader at thebalance.com.
Look at Less Regulated Markets
You can circumvent the PDT rule by using a broker outside of the U.S. Europe, Asia, and even Canada are potential alternatives. Many of these are actually trustworthy, reputable firms, the major difference being that they don’t follow U.S. regulations.
These can often provide you with the flexibility you want, but the downside is currency risk. You risk translation losses by opening accounts denominated in foreign currency.
Expand Your Horizons
Instead of searching for loopholes, you can try swing trading, where you hold your position for days or even weeks. Nobody said that betting on short-lived market inefficiencies is the only way to go.
Visit daytrading.com for a comprehensive overview of swing trading and what it involves.
The PDT Rule Isn’t A Scourge!
Frustrating it may be, but every coin has its flip side. Sure, the PDT rule limits your potential to make profits. But it equally limits your potential to lose all your capital due to bad trades involving leverage.
One simple solution to the PDT rule is to work with it instead of against it. It is an excellent idea if you’re new to trading. Sticking to cash and limiting your trades is a good way to gain experience.
And if you do choose to circumvent the PDT rule, do so wisely. Explore each of the options we’ve presented here and find one or two that work for you.