Today we’re going to look at how to avoid the PDT rule. If you are an active trader, you are likely to run into the Pattern Day Trader Rule.
If you are a frequent trader with a small account, chances are that because of the PDT rule.
This article will help answer the question of what the PDT rule is and why it is in place.
We will then discuss how to avoid the PDT rule in your trading.
PDT stands for Pattern Day Trader.
The PDT rule is a regulatory rule for traders who place more than 4 day trades within a 5 day period.
A day trade counts as a trade that is opened and closed on the same business day.
The PDT rule can be a major nuisance for retail investors.
This is because that for traders with more than $ 25,000 in their Margin account.
Even less and you will be out of luck.
Even for accounts greater than $ 25,000, the PDT rule will apply if the balance falls below this level.
May your account be restricted and you will be handcuffed in a market correction.
Before you think Wall Street is against you, think about this.
The rule itself is designed as a precautionary measure to protect smaller (often uneducated) investors from losing money and potentially becoming dependent on trading.
This would be in the same way that states have different gambling and sports betting restrictions to avoid the same thing.
So, discuss away whether it’s right or wrong.
Personally, I believe the government could do some kind of online test that could make it possible to forego PDT.
Although there is no shortage of opinions on either side as to what should happen.
Let’s work with what we have now.
The easiest way to get around the PDT rule is to simply convert your account to a cash account.
However, this can prevent you from gaining leverage and from executing certain types of trades.
Alternatively, by holding trades overnight, you can avoid them being classified as day trades and therefore not counting towards your total value.
Therefore, it can make sense to take a tactical approach with day trades.
However, if your strategy revolves around day trading, this is of little help.
Of course, making sure your account is above $ 25,000 is simple advice.
Although understandably anyone can give advice on how to solve the problems of living with more money.
You still have to get it!
Besides getting rich, one way to get around the PDT rule is to switch your broker.
This is because it is a broker’s job to flag accounts that violate the PDT rule.
For all the big brokers like Robin Hood, TD Ameritrade and Interactive brokers they will do this.
This is because they are governed by US law.
However, other non-US based brokers operating outside of US regulations can do what they want.
When you open an account with them you can often trade as many times as you like, even with a smaller account.
Well there is one major disadvantage to choosing an offshore broker.
Being outside of US jurisdiction is a double-edged sword. Sure, you’re avoiding the PDT rule, but it can cause you to lose other important investor protections.
If you are looking to take this risk, it is important to conduct due diligence in order to find the best and most reputable brokers that are offshore to minimize this risk.
Some of the names I have recommended are IG, CMG Markets, and Trade Zero.
If you go down this route, it is important to do full due diligence. Good questions are:
- How long has this company existed?
- What assets do they manage?
- Are they regulated by another investment company?
- Are customers generally satisfied?
- Do they satisfy your trading needs?
It’s easy to go online and find other articles that recommend the best offshore brokers.
The problem with this is that there is almost always a conflict of interest.
The author often receives referral income from some of these brokers, so of course he will write from them for less.
Don’t expect him to be there to back you up.
So let’s leave the referral links aside!
“I want to try my luck trading, but the PDT rule prevents me from trying my strategy. I only want to invest with a small amount of money because I just want to try it out to see if it is profitable, what should I do? “
This is a common question.
The best way to try a strategy is to trade it on paper first. Anyone can open a paper account and guess what? No trade borders.
So you can act and really test if your strategy is profitable.
And all while avoiding jeopardizing your money, piling up on pesky commissions, and bypassing the PDT rule.
If you find it to be profitable, you can feel more confident trading your real money, if not, you won’t have lost anything trying.
This is a great alternative that many new traders do not consider.
The PDT rule can be frustrating and annoying.
Even so, there are several ways to get around the rule.
This includes switching to a cash account, depositing additional funds, switching to an offshore broker or trading in paper.
While none of these options are perfect, they do offer some alternatives that you can handle them without sacrificing returns or strategy development.
Disclaimer: The information above is for For educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are unfamiliar with exchange-traded options. All readers interested in this strategy should do their own research and seek advice from a licensed financial advisor.