10 Ways to Avoid the Pattern Day Trader Rule (PDT Rule)

Rules are made to be broken and the pattern day trader rule is a rule new traders feverishly try to work around once they find out it’s an obstacle in their trading. Even if there were no way to break the PDT rule people would surely keep trying until they accomplished their goal. Without a doubt the PDT rule is annoying despite the fact it was implemented to protect traders from losing substantial amounts of money from their small accounts. Luckily for you, like every rule, it too can be broken or at least worked around. However, before we learn how to work around the rule let’s first find out what the Pattern Day Trader Rule (PDT Rule) is?

What is the Pattern Day Trader Rule (PDT Rule)?

PDT rule sucksA pattern day trader, as defined by FINRA, is the buying or selling of the same security on the same day in a margin account (margin = borrowed money). If the day trader executes four or more day trades within five business days you will be considered a pattern day trader, unless those trades were 6% or less of all the trades you made over those five days.

The pattern day trader rule (PDT Rule) requires any margin account deemed a “Pattern Day Trader” to maintain a minimum of $25,000 in account equity, in order to day trade without the rule restricting your trading.

The PDT rule only comes into effect when the net liquidation value goes below the required amount of $25,000.

In essence you need $25,000 in your margin account at all times or you can’t trade more than 3 times in 5 consecutive trading days.

I know what you are thinking. The PDT rule sucks and for all intents and purposes I am in agreement. However, there are ways to get around the pattern day trader rule and you need to decide which option works best for you to appropriately avoid the rule if you are learning to become a day trader.

Use a Cash Account

cash accounts avoid pdt rule

If you read the the pattern day trader rule carefully it only mentions the rule applying to margin accounts. A Margin account is a type of brokerage account which allows traders or investors to buy and sell stocks with borrowed funds. If you are not borrowing funds, because you have a cash account, the PDT rule doesn’t apply to you.

Pros of using a cash account

  • A cash account avoids the PDT rule.
  • You avoid margin fees.
  • Less risk using your own money vs. borrowed money.

Cons of using a cash account

  • It takes 3 days between trades for your cash to settle in your account (Trade +3 days – T3).
  • You need enough money to day trade regardless of T3.
  • You can’t short stocks in a cash account.
  • Less buying power no matter how much money you have in your cash account.

Update from Vanguard:

Coming soon at Vangurad: Faster settlement for your brokerage trades Effective September 5, 2017, the standard settlement cycle for most brokerage trades (stocks, bonds, and ETFs) will be reduced from 3 business days to 2 business days.

Update from Fidelity:

Starting September 5, 2017, your wait time between trade and settlement will shorten from three business days (also known as T+3) to two business days (T+2). The updated timeline affects most common security types, including equities, ETFs, and corporate and municipal bonds.

Open Multiple Brokerage Accounts

multiple brokerage accounts avoid pdt rule

If you open multiple brokerage accounts you can plan the amount of day trades in each account in the hopes of avoiding being deemed a pattern day trader. Many people who trade or invest in the stock market have multiple brokerage accounts for various reasons so it’s not uncommon to have more than one account.

Pros of using multiple brokerage accounts

  • If you balance your trades carefully you can avoid the PDT rule.
  • More accounts gives you access to more short borrows.

Cons of using multiple brokerage accounts

  • The more accounts you have the more complicated taxes become.
  • Must maintain the minimum requirements in each account.
  • Harder to keep track of multiple accounts.

Swing Trade

Swing trading is the act of holding a stock for more than one trading day. So, if you buy a stock 1 minute before the market closes and sell it 1 minute after the market reopens, you are considered a swing trader. Swing trading is a great alternative to day trading on many levels. If you are interested in becoming a day trader and find that there are too many obstacles, swing trading might be for you.

Pros of swing trading

  • Swing trading avoids the PDT rule.
  • You can work a 9 to 5 and swing trade.
  • You don’t have to constantly monitor your stocks.
  • Swing trading can be done with 1 computer.

Cons of swing trading

  • Holding positions overnight is riskier.
  • Higher margin fees.

Fund Your Account $25,000

If you have $25,000 then the rules that apply to a pattern day trader, even if you have a margin account, won’t apply to you. If you decide to have multiple accounts and avoid the PDT rule you will need to fund each account $25,000.

Pros of funding your account $25,000

  • The PDT rule doesn’t apply to accounts with $25,000 or more.
  • You have more options choosing a brokerage firm.

Cons of funding your account $25,000

  • $25,000 is a lot of to have sitting in 1 account.
  • Opportunity cost. What are you giving up tying that $25,000 to a brokerage account?
  • Temptation of taking larger positions due to more buying power is risky business.

Trade with a Proprietary Trading Firm

There are several prop trading firms that you can trade with. You can trade with them on their floor or you can do it remotely or virtually. These firms allow very small account minimums which is usually a benefit to new day traders. In addition, you can trade with the firm’s capital which allows you full day trading buying power without the day trading restrictions.

Pros of trading with a prop firm

  • Prop firms aren’t restricted by the PDT rule.
  • You can start trading with a prop firm for as little as $5000.

Cons of trading with a prop firm

  • Commissions and fees are higher.
  • You have to share a percentage of your winnings.
  • Not all prop firms are legit.

Open a SureTrader Account

According to their website, “SureTrader, a division of Swiss America Securities, Ltd., was founded in 2008 as a Bahamas-based broker/dealer regulated by the Securities Commission of the Bahamas. SureTrader is an Online Broker that allows you to Day Trade freely with 6:1 Leverage and No Pattern Day Trading Rules for your account“.

Pros of opening a SureTrader account

  • Off shore accounts are not restricted by the PDT rule.
  • 6 to 1 leverage.

Cons of opening a SureTrader account

  • It’s not US. based.
  • Commissions and fees are higher.
  • Customer service is said to need more improvement.

Trade Options

According to FINRA the PDT rule does still “apply to options” if you are day trading them but not if you are using a cash account. However, do you remember the T+3 problem in our cash account? Well, options unlike stocks, settle in 1 day between option trades and not 3.

That is HUGE and a big bonus for those trying to avoid the PDT rule.

Plus, options take up a significantly less amount of capital to trade.

For example, if you wanted to buy 100 shares of Apple stock you would need approximately $15,000 to do so. If you bought 1 call option at a $150 strike price you would pay anywhere from $100 to $500 depending on how far out your strike price is.

I know… Trading options seem complicated but they really aren’t. You can learn about call and put options here.

Pros of trading options

  • It takes only 1 day between option trades for your cash to settle in your cash account (as opposed to T+ 3 for stocks).
  • Trading options requires a lot less capital.
  • Buying a put option is a great and easier alternative to shorting stocks.

Cons of trading options

  • Options require time to expire.
  • Not all stocks have options.
  • Options can be tough to understand in the beginning.

Trade Futures

Everyday at 4pm the stock market closes but that doesn’t mean that trading is over. Some investors continue their pursuit of making money by trading in futures. Basically trading futures is a legal agreement or contract to buy or sell something at a predetermined price at a specified time in the future.

Pros of trading futures

  • Futures trading avoids the PDT rule
  • Trading futures requires a lot less capital.
  • Commissions and fees are less.

Cons of trading futures

  • Must open a separate account from your brokerage account.
  • Futures can be tough to understand in the beginning.

Trade Forex

Forex, also known as FX or foreign exchange is a decentralized global market where all the world’s currencies are traded. It is said that the Forex market is the largest and most liquid market in the entire world.

Pros of trading forex

  • Forex trading avoids the PDT rule
  • Commissions and fees are less.
  • Liquidity is greater.
  • There are no SEC regulations.

Cons of trading forex

  • There is very little transparency.
  • Complex price determination due to multiple factors.
  • You can’t seek out trading help as easily.

The Split Brokerage Account Wash Method

The split broker method is similar to opening multiple accounts with a twist. Let’s say you buy 100 shares of XYZ stock in broker #1. When you are ready to sell those shares you don’t sell them in broker #1. Instead you sell short 100 shares of XYZ in broker #2. Now you are effectively even on the trade. Then the following day you can close out both trades in their respective accounts.

Pros of the split broker account method

  • If you trade carefully you can avoid the PDT rule.
  • More accounts gives you access to more short borrows.

Cons of the split broker account method

  • The more accounts you have the more complicated taxes become.
  • Must maintain the minimum requirements in each account.
  • Commissions and fees will apply to both accounts.
  • Harder to keep track of multiple accounts.

Final Thoughts

There is no clean and easy way to avoid the Pattern Day Trader Rule unless you have the financial means to avoid it altogether. Sometimes I am a fan of the PDT rule because I see how foolish people can be with their money especially in the stock market. On the other hand, I think it’s a hypocritical rule that makes absolutely no sense. Think about this. The PDT rule prohibits you from trading unless you have a certain amount of money. It’s used to protect you and your small account. However, you can go to any casino where the law permits gambling and, no matter how much you gamble on a daily basis, you will never be restricted from gambling from the pattern day gambler rule.

Do you agree with the pattern day trader rule or do you think it’s stock market hypocrisy at its best?

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Disclosure:

Some of the links in this post are from my sponsors. I thought you should know because honesty is better then sugarcoated bullsh*t.

Important Resources

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  • Do your best to avoid day trading distractions. Especially the 10 I list here.
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