Are you trading with a small account and under PDT rule. Well here are some ways to get around
it. And my tips on trading with a small account under 25K.
If you are in the US and using a US based broker, you might be subjected to the Pattern
day trader rule if you’re trading with a small account under $25k. This rule could
potentially limit your trading since you can only day trade 3 times a week.
So in this video we’ll be talking about 4 ways to get around the PDT rule and some
useful tips I have for you if you are a beginner day trader with a small account. So if you
want to grow your small account and make that lamborghini money, just kidding, only corolla
and civic money here, please remember to drop a like.
First of all, lets go over exactly what this rule is. It’s a stupid rule my mother told
me when I was 6 that I gotta ask permission every time I want to eat my halloween candies
from trick or treating. Thats what it is.
And I can only do so three times a week. Even though the hard earned chocolates are rightfully
mine. How is that even fair? Somehow that analogy has to do with the PDT rule in trading.
You you just have to kind of connect the dots.
Just kidding, I never had to deal with the PDT rule, and never had a mother who let me
eat candies either.
PDT rule stands for Pattern day trader rule. It was established in 2001 by FINRA and the
United states SEC. basically it limits how many times you can trade if your account is
under $25,000. Under the PDT rule, the day trader can only place 3 day trades in a consecutive
5 day period.
A day trade is when you open and close a position within the same day, so for example if you
buy and sell a stock, or short and cover a stock positon. These are considered round
trips and they acount as a day trade.
Basically if you’re trading with an account less than $25k, and hence under the PDT rule,
and if you decide to trade 2 round trips on a monday, then 1 more on Tuesday. Then you
cannot day trade again until the following monday.
To many beginner day traders with a small account, this could quite a limitation. Afterall,
it’s your hard earned money. Its hard to accept that the SEC should be able to limit
your access to buying power. All in the name of “protecting investors”
But the PDT rule is not necessarily a bad thing all the time. I have some really useful
trading tips for beginner traders under PDT later in the video. So hold on tight.
So what are some ways for new traders to get around the PDT rule? Well th first option,
is to use a cash account. This is a little known fact that many beginner traders don’t
realize. PDT rule only applies to margin trading accounts.
Margin trading allows you to use leverage. Essentially borrowing money from the broker
to trade. So lets say if I have a $5K margin account with Interactive Brokers. Since the
broker allows me 4 times leverage, my buying power to day trade is $20K.
So if im looking to buy a stock like CCL thats currently trading around $11, my maximum size
is a bit over 1800 shares. Well there’s also margin requirement and maintenance. But
using the $5K account in a margin account would subject me to PDT.
Alternatively you can open a cash account wht Interactive brokers. Since the account
is cash, you will not have access to leverage, the 20k buying power we mentioned earlier.
So your true buying power is the same $5K. That means the most CCL stock shares I can
buy or sell is 454 shares.
The pros of trading with a cash account, is of course. You are not subject to the PDT
rule and the 3 day trade limitation per week. BUT the con is, you need to wait for the cash
to settle, and the settlement takes 2 days. Thats the standard for most brokers.
So if I decide to buy the most CCL shares you could wiht that $5k account. You buy and
sell 454 shares on a monday. You will not have access to that cash again until Wednesday.
I know some people are getting mad right now
But humbled trader, thats exactly the same as trading under PDT rule you are a liar.
But if lets say you trade smaller size. Instead of using the entire $5,000 to buy a single
position each time, what if you divide it up to $500 gross exposure per trade. So if
you use $1000 of your cash to day trade CCL on monday. You’ll still have 4000 cash left
to use on tuesday.
And you’ll get the cash settlement back on Wednesday. And so on and so forth. Basically
if you allocate meticulously just $500, or up to $1000 position for each trading day.
You could be in a better position and have access to more day trades than if you were
trading margin under PDT.
And yes obviously this method would only benefit you if you had a bigger account size. If you’re
trading with just 500, or 1000. You really dont have much to work with here. Whether
you are trading with a margin account, or a cash account.
The second way beginner traders can do to avoid PDT, is a variation of the first. Instead
of opening one single cash account, or one margin account with $5000. You divide that
capital up into multiple margin accounts.
So if you take $5k and split it into two separate margin accounts at different brokers. Then
you have a total of 6 day trades a week, and still keep a total buying power of 20K. And
honestly thats not bad.
Fridays are usually slower and choppier, so you can basically trade once each day from
Mon to thursday. And if one of those days present you a very nice set up, lets say a
low float runner is reclaiming vwap and squeezing all the shorts out. There could potentially
be set ups for you to use the remainder 2 trades.
Now obviously the more capital you have, the more margin accounts you can open to access
more day trades. If you have a total of 10k, then you can open 3 or 4 accounts depending
on the broker minimums, and you get to have a total of 9 or 12 day trades.
Next is the third option for traders with small account to avoid PDT rule, is to marry
a Canadian, move to Canada. Apply for a Permanent residency. Hit that like button to get approval.
And open a brokerage account in here Canada. Viola. We don’t have the PDT rule here in
canada.
Mmmm if I only know a Canadain trader. Nah
Now the third option, is one i dont really recommend. But some traders might choose to
do this. Is to open an offshore trading account. Only the US brokers have to follow the FINRA
and SEC rules including PDT.
Some offshore brokers that came to my mind is CMEG and Trade zero. There is no PDT rule
with CMEG. Whereas At trade zero international there is no PDT rule, but they do not accept
US applicants. American traders have to go with Trade zero America which still has the
PDT restriction.
With offshore brokers comes with a lot risks to the traders and investors since they are
not regulated by FINRA. A good example was Suretrader, an offshore broker in the Bahamas.
Back in 2015 and 2016 it was a really popular broker the American traders went to in order
to trade around the DPT rule.
But Suretrader was shut down due to lots of controversies, involving penny stock pump
and dump schemes by insiders, poor record keeping and financial rule regulations. We’re
not gona get to the details but.
Thats why i do not recommend going with this route. But if you choose to do so, make sure
you read all the reviews, fine prints, and just understand the risk and regularly withdraw
funds from your account.
The fourth way to get around the PDT, is to buy and swing trade overnight. Since PDT rule
only applies to day trades, meaning buy and sell a stock within the same day.. When you
buy a stock overnight and sell the next morning, that does not count as a day trade. Same thing
if you decide to get into swing trading for a couple of days or weeks.
I have a video on my swing overnight buy strategy if you want to check that out.
But honestly, this brings us to the topic of a lot of costly mistakes I see beginner
traders make because they’re under the PDT rule. Here are some important tips for trading
under PDT that might help you out.
1. Keep track of your 3 day trades. And check
yourself before entering a day trade. If you break the PDT rule you might receive a warning
from your broker the frist time. But the second violation could result in the broker freezing
your account for 90 days, or until you can fund it to above $25K.
2. Use your day trades ONLY if you see a qaulity
set up. Do not force trades. Isee a lot of new traders under PDT, and they feel like
they MUST use up all the 3 day trades for the week otherwise its wasted.
No thats absolutely not true. If there are no A+ set ups for you in this market condition.
Dont force trades. Thats what we call overtrading.
Same thing with swinging a stock position overnight, Don’t enter a swing position
just because yoou used up all your 3 day trades for the week and you are swinging a position
over night just for the sake of it.
Or even worse, 3. You should never turn a losing day trade into a swing trade.
i see many beginner day traders lose track of their day trade amount on the weeek, and
only realize that you cannot sell their position because they used up all the day trades, and
they end up having to hold a losing position overnight.
What happens if a stock tanks overnight, what happens if the shady penny stock company decide
to do an offering after markets closed? You should never turn a losing day trade into
a swing trade. thats what we call bag holding and trading on hope.
Like i’ve mentioned many times before. Trading is a business, not a hobby. And definitely
not something you can pick up in 1 week or 2 weeks just because you suddenly have the
time to sit in front of the computer during quarantine.
It takes money to run a business. And it takes money to really grow a trading account. The
minimum I would recommend to start trading is at least 4 to 5000. The marketing of growing
a small 500 to a million, while working only 1 hour a day, and from anywhere in the world,in
six months is really unrealistic.
Trading under PDT is not necessarily a bad thing, if anything, it forces a new trader
to be more selective and patient. Only entering trades they have planned out as their A+ set
up. No chasing breakouts, and definitely no following chatroom alerts blindly.
Are you trading under PDT rule? Let me know if you are using one of the 4 methods I mentioned
in the video any
other tips on trading with a small account.