What is the pattern day trader rule? How can I get around the pattern day trading rule? PDT rule explained, Stock market trading, Options trading
Disclaimer
welcome to looking at the markets with David Moadel
today we're going to talk about what is the pattern day trader rule and how can
i get around the pattern day trading rule
let's talk about it the pattern day trading roll put into effect in 2001
places limits on stock and option buying and selling for people with margin
accounts who want to trade multiple times during the trading day it was put
into effect by FINRA which is the Financial Industry Regulatory Authority
the following are excerpts regarding the rule found on
FINRA's website on august 8 2016
so let's see what FINRA has to say about it
quote you will be considered a pattern day trader
if you trade four or more times in five business days
now let me explain that when i say trade when they say trade they mean for we're
talking about for same-day round trip trades of the same security
alright so i'll give you an example to help clarify it
let's say you you buy apple stock
all right and then the same trading day during the same trading day you sell it
that's one round trip I called a round trip
all right so they're talking about you buy and then you sell
that's one they consider that one trade also if you were to short sell apple
stock and then buy it back or cover your short the same day the same trading day
that would also be considered one round-trip trade for one trade
all right and if you make one round-trip trade either buy and sell or short and
then cover your short within if you do that within the same trading trip same
trading day
that's considered one trade now buying today and then selling tomorrow is not
considered a day trade and also short selling today and then covering your
short tomorrow again that would not be a day trade
they're talking about each time you do it you do it within the same day
all right and and it has to be the same the same security that you're buying and
selling that same day
ok or shorting and covering the same day so meaning for same-day round trip
trades of the same security within five business days
and if you're trading if you're day trading activities are greater than six
percent of your total trading activity for that same five day period a pattern
day trader must maintain minimum equity on any day of twenty-five thousand
dollars on any day that the customer day trades so i'll paraphrase that in my own
words again if you make more than three round-trip trades
okay round round trip
same day trades of the same security
every time
if you do that within five business days then you're considered a day trader
according to finra and if you do that you have to have twenty five thousand
dollars in your account in that trading account
it doesn't have to be all cash you can have cash and stocks or cash and options
or kasia and cash and stock and options worth twenty-five thousand dollars all
together in that trading account as long as it adds up to 25,000 alright so does
that include options
yes this includes options not just stocks
according to the federal website the day trading margin rule applies to day
trading and in any security including options so its stocks and options
does it include short selling yes we discussed that already
as with current margin rules all short sales must be done in a margin account
if you sell shorts and then buy to cover on the same day and we're talking about
the same security of course it's considered considered a trade
what happens if you violate the rules
what it what happens if you within the same account if you don't have
twenty-five thousand dollars worth of cash and equities in that account and
then you day trade more than three times within five business days
what happens well non-compliance has consequences if the account falls below
the twenty-five-thousand-dollar requirement
you will not be permitted to day trade until you deposit cash or securities in
the account to restore the account to the 25 thousand dollar minimum equity
level
so you'll be barred from day trading until you come up with more cash or
stocks options
whatever equities you've got to fill up that at that particular account up to at
least 25 thousand dollars in value otherwise in that account you'll be
barred from day trading
that's the that's the consequence
and so it places a pretty pretty big restriction on people with smaller
accounts sizes who want to day trade who want to trade the same security multiple
times within the same account within our during the business day so let's say you
want to get around around this rule and you want to be legit about it you want
to you want to stay within the rules and yet you want to kind of work around the
rules
well there are ways to do it so if you want to do frequent day trades and you
don't have twenty-five thousand dollars in your trading account because that
would be the easiest way is to just deposit more money or stocks or options
into your trading account
get it up to the twenty-five-thousand-dollar level that's
one way to get around it but let's say you don't have that much to work with
you don't have twenty-five thousand dollars
so how can you get around this rule well I found four ways and there are probably
other ways
there might be other ways but these are the four that I found to be the most
common and probably the easiest and none of these are really easy but they're in
my opinion the easiest ways and you could do any of these or or a
combination of these one you could use a cash account instead of a margin account
because if you look back at the rule
let's go back a little bit this is for margin accounts
margin accounts only that's so there's a disadvantage to this though you
yes see you would not be able to do any short selling
but since you need a margin account to short sell so the good thing about the
cash account is that you know that you don't have that day trading rule
restriction
you're not using any margin here you're just using your own cash you're out
you're only spending money that you actually have in cash
you're not borrowing any money on margin or you know any capital on margin and so
that allows you to buy and sell within the same trading day multiple times
without having to worry about the day trading rule but if you're interested in
doing short selling as a day trader then this would not work for you but if
you're only going to go along
ok or you know let's say instead of short selling
you could buy puts if you want to make a bet that the that a stock will go down
let's say you don't have to short sell you can you can buy put options and that
would not be considered shorting that would be considered a purchase another
method is to use multiple brokers
this is probably the easiest way actually i think if you don't have a lot
of cash if you don't have twenty-five thousand dollars in your account
here's what you can do use multiple brokers and every five business days do
up to three
no more than three round-trip day trades in each brokerage account
alright so if you have - brokerage accounts then you'd be able to do three
day trades
in in each account and so for for that would be a total of six day trades
within five business days
if you had two different if you had accounts at two different brokers
if you have accounts at three different brokers then you'd be able to do 3 plus
3 plus 3 which would be 90 day trades within five business days you would just
have to do up to three per 4 broker earth or per account so you know that
you there are there are only so many brokers out there but if you open up
three or four or five different accounts in in you know multiple I i'm saying if
you open an account at three or four or five different brokers then you'd be
able to do more day trades
another method is to use offshore accounts for example and outside of the
United United States because FINRA would not have control necessarily over the
offshore accounts like it would / United States accounts but if you're
considering doing that please be careful and do your research first
you know because offshore accounts you know that that could be tricky business
so please be careful with that and another way to get around this rule is
to trade futures instead of common stock or options because the pattern day
trader rule applies to stocks and options but not two futures and so yeah
you know if you're interested in trading futures instead of stocks or options you
might look into that but again please be careful and do your research first
futures can be tricky business
yeah just because you understand how to trade stocks or options doesn't mean
that you necessarily understand how to trade futures
it's it's different alright so be careful if you're going to do that
the takeaway is that maybe you like the rules or maybe you don't like the rules
but if you're going to succeed as a trader
you'll need to understand the rules and learn how to make best make the best of
the situation
all right and if you'd like help with this or if you'd like to put together a
trading plan if you want some assistance with finance stocks options trading or
investing
please feel free to contact me my email address is David Modell and that last
name is Emma Oh a dl David Modell @ gmail.com
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