What is Pattern Day Trading

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.

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