Today, we’re tackling one of the biggest challenges in day trading…
The Pattern Day Trader (PDT) rule.
I don’t know of any other trading rule that frustrates traders as much as the PDT.
It can cause you to miss out on trade opportunities. And even turn winning trades into losing trades.
The consequences of breaking the rule can be catastrophic…
So learn how you can avoid falling victim to it.
I’m sharing some insider tips on how to outsmart the PDT rule and keep your trading journey on track.
Why It’s Crucial to Understand the PDT Rule If You Day Trade
If you’re new to trading, you’ve probably heard of the Pattern Day Trader (PDT) rule.
It’s a rule that impacts traders who have less than $25,000 in their trading account.
But there’s more to it than just the dollar amount in your account…
The Rolling Five-Day Period
One of the most crucial aspects of the PDT rule is the concept of a rolling five-day period.
If you have less than $25,000 in your trading account you’re only allowed three day trades every five days. The rule doesn’t follow the calendar week from Monday to Friday. It’s any five consecutive trading days.
So if you make three day trades on Monday, Tuesday, and Wednesday, you won’t be able to make another day trade until the following Monday.
And even then, you’ll only regain one day trade.
Why You Should Care About The PDT Rule
Some brokers take PDT violations seriously.
Your broker can lock your account for 90 days if you break the rule. This means you’re sidelined from trading for a significant period.
Violating the PDT is also dangerous if you trade volatile stocks…
If you exceed the three-day trade limit, you may not be able to exit a position.
Imagine being stuck in a winning trade that turns against you because you can’t exit due to rule violations.
It’s a nightmare scenario that can turn a winning trade into a massive loss.
To avoid falling victim to the PDT rule, keep track of your day trades.
Most brokers provide a running total of your day trades, but it’s wise to keep your records as well. Write your trades down in your trading journal.
If violating the PDT rules sounds like too big of a risk to take — consider these two tips to get around the PDT rule…
Strategy #1: Embrace the Cash Account Advantage
First up, let’s talk about cash accounts.
Margin accounts offer perks like increased buying power (leverage) and shorting capabilities. But they also come with the PDT rule.
Cash accounts are PDT-free zones…
That’s right, no more worrying about day trade limits cramping your style. With a cash account, you’re free to trade as much as you want without the PDT rule looming over your head.
However, you have to have enough cash in your account to cover your trades.
That means your cash has to settle from one trade before you enter another trade.
This usually takes two to three days.
So don’t use your entire cash account in one position. Or you’ll be sitting on the sidelines for a few days just like if you ran out of day trades.
Strategy #2: Harness the Power of Afternoon Trading
Now, let’s shift our focus to another savvy strategy: afternoon trading.
This approach is a smart way to work around the PDT rule without using up precious day trades.
Picture this: you spot a stock with serious momentum in the afternoon. Maybe it’s on a multi-week breakout or it’s showing strong signs of late-day strength…
You enter a trade, but instead of rushing to sell before the market closes, you hold onto it overnight.
Why?
Because if it closes strong, it might gap up the next morning, and that’s where profit potential lies.
And if you buy a position one day and sell the next day, you don’t use a day trade.
Just remember to set your stop losses and be ready to sell into morning orders to lock in your gains. It’s all about playing smart and strategic in the market, even when faced with pesky rules like the PDT.
With the right strategies in your arsenal, you can navigate the PDT rule like a seasoned pro.
Have a great day everyone. See you back here tomorrow.
Tim Bohen
Lead Trainer, StocksToTrade