Before we go any further with this article, we need to explain what is PDT rule is and why it is important for brokers and traders. Basically, PDT is short for Pattern Day Trader, and a day trade is when the person buys stocks and sells them the very same day, to cover the same expense on the same day. The PTD covers the safety aspects and makes sure the risks are reduced enough, so the trader won’t make silly mistakes. As the days go by, and the trader performs well, keeping the minimum balance on their account, they are improving their buying power.
There is also a required minimum money balance ($25,000 to be exact), so the person can hold to this rule, and become a daily trader. According to thedaytraderchatroom.com, the term PDT describes the day traders who maintain a chain of trades for at least five days, using the same account. The PDT rule, as we said, should reduce the risks for overtrading and other activities that can ruin the whole process and leave the person without a penny in their pocket.
But, can traders avoid this rule? Should they really do that? Knowing all the rules, and being aware of them will always turn out well for the trader, but there are those who will anyway want to risk, and they consider the PDT rule as a big restriction that can mess their trading activities.
How does day trading work?
Day traders track and use the daily price movements, so they can get into short and long trades. When they close the trade before the day ends, it’s considered as day trading and the PDT rule applies. There are some situations when the activity is closed the same day, but it’s still not considered as a day trade. We can say that this status depends mostly on the number of trades and their duration.
These traders can use specific analytics tools to track the price movements and use the popular broker platforms for that purpose. But, no matter the tools, platforms, and approach used, the rules are simple – they must trade at least four times (or more) in five business days, and the activities must go over 6% of the total activity. The platform can ban the users that don’t meet this requirement and block their account too.
What happens when the rule is violated?
Most of the time, the broker will forgive your first mistake, and there won’t be consequences. But, they will supervise your activities, and monitor every step you take, so they can track even the first signs of suspicious behavior. If you don’t meet the demands, you will probably end up suspended or banned forever.
That’s why some traders try to find a way to legally overcome it. But, what if we tell you that there are some options to get around it, that won’t discourage you with the rules and restrictions.
Here are some of the best suggestions we found you when it comes to this rule:
- You have to make sure you always have at least $25,000 on your balance. That means you take trading seriously, and you know your limits too. If it goes a little below it, you may receive what’s called a margin call, and you have a few days to get back to the required minimum. If you are over it, you don’t have to worry about the margin call, as long as you maintain that balance. In this case, the PDT rule doesn’t apply to you, and you don’t have daily limits when trading. On the other hand, a lot of people have great potential in this field, but they can’t really afford that money.
- Managing more than one broker account can be one of the solutions, but you will have a lot of things to remember and deal with. You can make more trades without even getting close to the PDT rule. It applies to an account, not to a person. But, can you afford to maintain more than one profile? It can be pretty exhausting.
- Limiting your daily activities is one of the best ways to maintain balance. If you limit your daily trades, this rule won’t apply to you.
- Using foreign brokers is another effective solution, since their jurisdiction is abroad, and the local laws don’t apply to them. But, fees and commissions may apply too. Also, finding a reliable broker in a foreign country can be a huge challenge for the individual.
- If you try to learn about swing trading, you’ll be able to balance too, since you won’t close the trade the same day, but you wait for the next one. But, keep in mind that these swings are risky, and things can change a lot during aftermarket hours. It’s not a day trade and the PDT rule doesn’t apply, but the risk is bigger than usual.
- Use a cash account, even though it’s also a little risky and illegal. There are some tricks and regulations you can use, but you have to be aware of the local laws, so you won’t do anything stupid, that will cost you a lot. For example, the USA has a regulation that allows the traders to use cash accounts for their daily activities, without law concerns.
The final thoughts
Trading is, in general, an activity full of risks. But, you are the only one who can decide if the risk is worth taking or not. Small traders should be aware of the limits, and respect the rules of the game. Surely, there are ways to do whatever you want without harming anyone else, that will increase the profit, and make you satisfied with your activities.
But, before you take any step, you will have to literally sit down and learn the rules, so you can create a profitable strategy, and enhance your trading skills too. But be aware that someone is always watching on you, waiting for you to make some mistake…