Pay Yourself First!

Trading should be treated just like a business. From an employee standpoint it is standard to receive paychecks, whether weekly, bi-weekly etc. From a professional trader’s standpoint we want to treat trading as the business with the expectation to receive a weekly paycheck.

The Team at The Profit Room makes it a routine to withdraw trading profits every 7 business days, while retaining the same account balance. Creating the habit of paying yourself first forces you to realize and reap the benefits of true trading success. There is no real reason to have an extremely large account. Large Accounts without discipline can put you into a situation where you are able to over leverage, double up or down, and just simply add to losers because of the “excessive” amount of capital available. This is damaging in itself due to large risk exposure which leads to larger losses.

Let’s say you started with an account of $30,000 in capital in the Equities Market. The broker provides you the 4:1 leverage, if you are applying for a day-traders account. With this account you have the ability to day trade and swing trade. It’s imperative to have a strategic approach, which involves a trading plan that includes risk/money management. A true winning approach allows you to withdraw your trading profits weekly. Profits of course will vary assuming that A.) You are Profitable B.) You are Consistent. meaning if you have trading losses within days of that week, you are still able to end the week net positive. This thought process is logical, and achievable and should also apply if you are trading the Forex or Futures market with $3,000 in capital. The profits will vary but the withdrawal frequency should remain the same. The concept is to Pay yourself first while retaining the same balance in your account, never adding because you are consistent and profitable. If you have to add to your account, you are obviously losing money and never really mastered the art of being able to trade profitably.

If you are only swing trading, pay yourself bi-weekly or monthly. Most swing trades last an average of 3-5 trading days.

We’ve mentored traders who are now professionals. One Trader in particular traded with a large account and suffered from massive drawdowns. It stemmed from a desire of wanting to have the ability to have 10-15 contracts trading futures, or $5-$10 lot sizes in Forex. The desire to trade large size consumed this trader rather than the thought process of paying one’s self first. After further evaluation this trader finally came to the conclusion to only have no more than $10,000 in their account trading futures. Although this trader was trained by us, the initial greed and inner thoughts we have no control over, but the skill that was mastered for this trader to bounce back and continue to profit is the only thing we can take account for.

Always remember Trading is a business treat it as such.

~ The Profit Room

What is Pattern Day Trading

Pattern Day Trading is for a stock market trader who executes four or more day trades in five business days in a Margin account. This rule was created by FINRA (financial industry regulatory authority) to protect the beginner traders. (So they say) In order to have a pattern day trading status you need to have $25,000 in your account at all times, as long as you decide to make four or more day trades in five business day.

Active traders who have $25,000 in their brokerage account can apply for a day trading account. Day Trading accounts your U.S broker will provide you with 4:1 leverage and that is only for a trader who has an account with $25,000 or more.

 In a regular margin account your U.S broker will offer you 2:1 leverage. For example if you funded your account with $500 and you applied for a margin account, you will then have an additional $500 bringing your total purchasing power to $1,000. With leverage comes responsibility. You can lose more than your initial balance and some of your broker’s margin, which will cause a “margin call” You will be required to fund your account to the “margin call balance” deemed by your broker. With a margin account you are able to short sell stocks. You can not short sell a stock in a cash account.

 In a cash account the pattern day trader rule does not apply. Cash accounts, with a buy or sell transaction with stocks there is a 3 day settlement. As in your funds are tied up (assuming you used all your cash to either buy or sell a stock) You will simply have to wait until the funds settle. Cash account traders will limit their trades to a very few due to the cash settlement standards.

Typically traders who have a margin account with funds under $25,000 are generally the ones who often get in trouble for making four or more trades in a three day rolling period. Your broker calls this “free riding” you are trading on unsettled cash even if you have a margin account but not enough to clear you of the pattern day trader status. There is a penalty if warned more than twice, such as freezing (locking your account) for 90 Days.

How to get around the PDT (pattern day trader law)

There are a few ways around this rule, if you do not have the $25,000 in your account. One way is to Swing trade.

1.) Swing Trading is not day trading, you will be taking advantage of time and allowing the trade to work out based on analysis and trend. You can make a few swing trades in your account without over trading. Swing trades generally takes 1-3 days or up to a few weeks to work out.

2.) You can open multiple brokerage accounts. The only thing you will have to keep track of the trades taken in each account. Remember no more than 4 trades in a 3 day rolling period per account.

3.) Learn how to trade a different market. Futures and Forex both these markets require way less capital to trade. There is no pattern day trader rule with these markets.

4.) Open up an overseas brokerage account. The very last step on this list. The U.S markets are governed by the S.E.C and the brokerage accounts are protected by SIPC (Securities Investors Protection Corporation) up to $500,000. Do your due diligence on an overseas broker, if you decide to go that route.

Just know that small accounts have the potential to develop into large accounts. The Profit Room have done numerous small account challenges. We took $1,000 in forex and grew it into 6 figures. As well as our swing trading account challenge. It’s just a matter of the proper education/mentorship.