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Overcoming the PDT Rule
Friday, 18 October 2019

For those wanting to become a day trader it is a good idea to have a sound understanding of all the different regulations and rules that apply to that kind of work. Many smaller traders find the Pattern Day Trader (PDT) rule to be a major restrictor to trading.With it causing such a restriction, what many traders ask is, is there away to work around the PDT rule? The answer is yes. There are a number of trading strategies that can be adopted, which each have their own merits.


Understand what day trading is

But before that, you must first understand exactly what day traders are and what day trading is. A day trader utilizes movements in the price of a stock throughout the course of a day to make short or long trades. A day trader closes all their trades before the day ends and, thus, will not keep a position over night. They usually operate by closely examining the price of a certain stock and then enter and exit at a fast pace, earning a small profit in the process. These small profits can quickly add up over time.

Depending on the number of these types of trades that a trader makes will determine whether or not they will be classed as a day trader. Make four over a consecutive five working day period and you are classed as a day trader.
These types of trader usually spend lots of time each day using technical analysis methods to analyze price action. This is the amount the stock moves during a set period of time. A day trader is good at analysis and has the ability to deal with stress really well. This is because each an every minute there is so much happening on the stock market, and a day trader must stay on top of it all to identify trends in the price of stocks change. A high level of volatility is the best friend of a day trader.
How the PDT rule effects pattern day trading
A pattern day trader differs from a day trader in that they have further requirements on the amount of trades that must be met. It is these traders that must adhere to the PDT rule. It states that a pattern day trader must hold a minimum of $25,000 in their account with a brokerage firm. This equity does not necessarily have to be cash, it can, in fact, be made up of any eligible securities. These further requirements, as set by the Financial Industry Regulatory Authority in order to reduce the level of risk that is associated with day trading.
The authority declares that the minimum equity level of $25,000 should be held in a brokerage account before any day trading activity can begin. If / when the equity level in the account goes below $25,000, the trader is forced to break from trading until their account has the minimum equity requirement in it. Depending on the brokerage firm that the account is with, for such a breach of the rules, the account can be locked from anywhere between 1 and 4 months.
The PDT rule was brought into effect in order to protect the interests of new and inexperienced day traders who could easily get themselves into serious financial trouble. The introduction of the rule makes things much more difficult for those smaller traders, particularly those who have less than $25,000 in equity. They are now limited to only making a few trades within any given five day period.
Working around the PDT rule
At first glance you may have assumed that it is difficult to work around the PDT rule, but on close inspection there are some simple loopholes that you can easily exploit.
Firstly, you can reduce the number of trades that you make in a single day, thus automatically you become disqualified from the Pattern Day Trader rule.
Secondly, you can open numerous accounts with various brokerage firms. This allows you to make as many day trades as you like over a consecutive period of five working days. However, this does mean filing your taxes accordingly if you use multiple different accounts. Although you may need to put more time and effort in doing your tax returns, this is a perfectly legal practice and a good work around.
Thirdly, you could try your hand at swing trading instead. This sort of trading involves holding a position over a number of days or weeks, rather than a single day. It is much less stressful than day trading and enables you to avoid the PDT rule. However, do not be fooled. Swing trading is just as risky as day trading.
Fourthly, you can make your day trades using a foreign brokerage firm. Lots of the foreign markets out there have less strict rules when it comes to the minimum levels of equity required.
Fifthly, you could use a cash account rather than a margin account. It should be noted, however, that day trading from a cash account is usually prohibited with most brokerage firms. One way to circumnavigate this is to ensure that the free riding prohibition of the Federal Reserve Board’s Regulation T is not violated at any point.
Lastly, failing all of these, you can simply decide to begin trading in other, totally different markets. Examples of these include the options market and the currencies market. The minimum equity required for these such markets are often lower than the $25,000 needed for day trading.
Each of the mentioned loopholes come with a set of pros and cons, which should be considered before making a decision on which is the best one for you to utilize in order to get round the PDT rule.
To remember
Under the PDT rule, any qualifying traders are required to hold a minimum of $25,000 in equity in their brokerage account. They are also required to make at least four trades in a consecutive five day period.
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