What is the Pattern Day Trade Rule?
Pattern Day Trade rule also known as PDT is in place to protect the beginner traders. It is important to know this rule if you have less than $25,000 in your bank account or trading account and you are an active trader.
The rule states if you are an active trader, meaning if you make 4 or more trades in a 5 day period, then you will be stuck in your fourth trade place. Therefore you won’t be able to make any more trades until your early trades are cleared. For example, if you made two trades on Monday, one on Tuesday, and one on Wednesday, you won’t be able to make a trade on Thursday; therefore, if the market is crashing, you will be stuck in that place.
It is the law; you can call your broker, but they won’t be able to do anything for you as they are bound by these regulations by the SEC.
When can PDT be a problem?
Let’s say you are entering a position with a hundred chairs, and then you are selling on Monday, Tuesday, Wednesday, and Thursday. You won’t be able to trade if you spot something better because you stocked up your four positions already. That’s the one main problem with Pattern Day Trade, you have to be aware of it, if you have less than $25,000 in your account and you are an active trader.
How to avoid PDT
One way to avoid the Pattern Day Trade rule is to set up two or more brokerage accounts. Let’s say you have $20,000 in your account, and have one account at Scottrade, Option House, and have a third account at Trade King. This will allow you to have four trades on each of those brokerage accounts, which will give you about 12 trades total.
Again, you will have to be cautious when trading, but then you will also have to worry about managing all logins, trades, and making sure your amount does not reach $25,000. However, this way is great because it will allow you to trade more actively. As many people use this way to avoid the Pattern Day Trade rule.
What happens if you have more than $25,000?
Now if you have more than $25,000 in your account you will get flagged as a Pattern Day Trade. Your margin requirements will be slightly higher because they think you are a bit more risky, but don’t worry there is nothing to worry about.
If your account drops below $25,000, you will again be bounded by the PDT rule. Just be aware of the pattern day trader rule because it is in place to protect beginner traders.