Pattern Day Trader Rules (PDT) – How to Avoid Being Classified As One

By September 1, 2018featured, Trader Tips

In this article, we’re going to go over what are known as Pattern Day Trader Rules (PDT Rules), and how you can avoid being classified as one yourself.

Every trader shudders when he hears the words ‘Pattern Day Trader’ (PDT). Though this rule was introduced by the Financial Industry Regulatory Authority, Inc. 

(FINRA) to supposedly safeguard the interests of the trading community, many traders who are just starting out and have smaller accounts are the most affected.

Many see the Pattern Day Trader Rules as a major barrier to entry and many more go a few steps further and consider the rule a horrific stifling of trader activity in an otherwise free society, courtesy of the same nanny society that likes to regulate how big your soda can be, whether your children can eat ranch dressing with their school lunch, how muddy your vehicle can be or whether or not you can legally sell your daughter’s Girl Scout cookies in front of your home.

Pattern Day Trader Rule

Now, without proper guidance about the rules (the pattern day trading rules, not the Girl Scout cookie rule) and how to avoid being classified as a Pattern Day Trader.

Many traders let go of profitable trading opportunities to avoid getting caught in this hoopla.  You don’t have to.

In order to help the small traders, we have asked our experts to touch on all aspects of a Pattern Day Trader.  

So, in a show of solidarity, go get yourself an extra large fountain soda (especially if you live in New York), retreat to your “safe space” and read on.

In this article, we’ll throw light at the things that can label you as a pattern day trader, the rules that are applied to a PDT account and how you can trade around the rules without being classified as a PDT.

Download a PDF version for this post.

Let’s First Define Day Trading

Pattern Day Trader Rule

If a trader buys and sells a security in the same day or sells short and then buys to cover the position on the same day, the trades are considered to be a day trade.

Day Trade Examples:

  • Example 1 of a long day trade:
  • If you buy 100 shares of Apple at 09:35 AM and sell the same by 12:10 PM, it is a day trade.
  • Example 2 of a long day trade:
  • If you buy 100 shares of Apple at 10:20 AM and sell only 50 shares on the same day by 12:10 PM, carrying the remaining 50 shares to the next day, it is still considered as a day trade – even though you didn’t exit all of your shares.
  • Example 3 of a long trade:
  • If you buy 50 shares of Apple at 09:45, again buy 50 shares at 10:15 and buy 100 shares once more at 11:00 AM, then sell 200 shares at 02:30 PM, this is considered 3 day trades.
  • Example 4 of a long trade, which is not a day trade:
  • If you buy 100 shares of Apple at 10:00 AM on November 22 and sell the same on November 23, 12:10 PM, then it is not considered a day trade. 
  • The “day” definition, for the purposes of a PDT, is a single business day—not a 24-hour period.
  • Example of a short day trade:
  • If you sell short 100 shares of Netflix at 09:40 AM and then cover by 03:20 PM, the same day, it’s a day trade.

If you’re STILL not fully grasping it, see our blog post: What is Day Trading? We Break it Down!

Now that we are clear about what a day trade is, let’s move on to “pattern day trading”.

What is a Pattern Day Trader (PDT), as defined by FINRA?

The FINRA website defines a pattern day trader as one who “day-trades four or more times in five business days and the day-trading activity is greater than six percent of the total trading activity for the same five-day period.”

Apart from the above rule, the brokerage firm has also been given some discretionary powers to designate a trader as a PDT, if the firm is certain or has a reasonable basis to believe that the trader is a pattern day trader.

FINRA site states that, “if the firm provided day-trading training to you before opening your account, it could designate you as a pattern day trader.”

Surprising, but that’s how it is.

What happens if one gets classified as a Pattern Day Trader?

The minimum equity requirement for trading as a PDT is $25,001.  If you have $25,000 or less in your trading account, you will trigger Pattern Day Trader Rules.  

This amount (any amount over $25,000) has to be deposited in the account before one starts trading. 

This amount has to remain in the account when you trade and it has to be left in the account for two business days after you close your final trade.

Example: Even if a PDT closes all of his open trades on Friday, November 18,  he is not allowed to withdraw the money from the account until Wednesday, November 23.

If the trader fails to maintain the equity margin requirement of $25,000, the brokerage firm will issue a day-trading margin call and the trader will have, at most, five business days to deposit the required funds, barring which, the account will be limited only to trading on a cash available basis or until the trader deposits the required funds.

Now that you are aware of how a trader gets classified as a PDT and the margin requirements of a PDT account, it’s time to give you a few tips to avoid getting classified as a PDT.

Day Traders Pro Tip: Open more than one trading account

If you are starting new and have limited funds, it is better to open different accounts with different brokerages.

With funds split in two, you can make six day trades (three in each account) within a span of five days and still not be classified as a PDT.

How to do unlimited day trades with two accounts?

There are no rules barring someone from having multiple accounts and, as such, this is a legitimate method.

Though this may entail higher commissions and statutory charges, it’s better than having your account frozen or being unable to execute a critical exit out of fear that it will trigger a PDT classification. 

That said, it is important to check with your broker. 

If you open up multiple accounts with a single broker, it could be considered a single account for the purposes of determining your PDT status, depending on the broker.

Let’s look at an example for clarity:

Suppose you have accounts with Broker X and Broker Y. You want to day trade the Apple stock, as you believe it is having great momentum.

So, you buy 100 shares of Apple stock in the account at Broker X.

After three hours, when the time comes to close your position, instead of selling stock that you had purchased in the account with Broker X, you sell short in the other account created with Broker Y. That leaves you with a flat position.

  • Broker X               =Buy 100 Shares
  • Broker Y               =Short 100 Shares

Keep both the positions overnight and, the next day, close both of the positions at the same time, thereby closing both of the open positions.

Because you haven’t closed the trades on the same day, it doesn’t qualify as a day trade. Hence, using this technique, you can attempt any number of day trades.

However, there is a drawback:

  • You will end up paying two extra commissions, brokerages and taxes.
  • You will also have to cater for slippages, both while buying and selling, though, sometimes it might be against you and other times it might turn out in your favor.

Hence, slightly cumbersome, but worth a try.

Buy today and sell tomorrow to avoid PDT when trading

The initial hour of trading at market opening and the last hour’s trading before market close are considered to be the most liquid.

If you are able to identify stocks with strong momentum, it is better to buy the stock at the market close and hold the position overnight.

In a bullish market, stocks with strong momentum that end the day close to the high point of the day are likely to open strong next day.

You can allow your money to work for you while you sleep.

The next day, you can close your position right at the market open, when the liquidity is pretty high. Because the positions are being held overnight, they are not considered a day trade.

You can get additional information about day trading from other experienced traders.  If you are just starting out as a trader, a carefully chosen trading mentor can offer valuable advice to help you to avoid PDT pitfalls that ensnare many an unsuspecting trader.

If you’re new to trading, be sure to check out our post on getting started with stock trading!

Also be sure to check out our Steady Trade Podcast!  In this episode, We go into the PDT rule, explain how it works and make the most out of your trades!

Diving into the Stock Market world doesn’t have to be scary, just make sure you’re prepared! 

Want to learn to Day Trade like a pro?

Try StocksToTrade for 7 Full Days for just $7.00!  StocksToTrade was built by traders for traders. Cut the amount of time, stress, and anxiety you experience behind the keyboard when trading and only deal with the handful of real trade opportunities daily. Find the stocks that matter!

How much has this post helped you?
1 Star2 Stars3 Stars4 Stars5 Stars (5 votes, average: 5.00 out of 5)
Loading...

Join the discussion 22 Comments

  • PoLo_MeX says:

    Good and useful post for new traders, and again you make me laugh when you said: the pattern day trading rules, not the Girl Scout cookie rule… haha.

    I have one question… I have a CASH account with Interactive Brokers and I founded initially with $26k, but now I´m down and I only have $23k left, but for my surprise, I can do more than 4 day trades per week. For example I can do 10 day trades on a week and I don´t have problems. Why? Why the PDT rule does not apply to me?

    If you know the answer I will appreciate so much.

    Regards!

    • David says:

      Polo_Mex, from several other Traders, I have been told with a Cash account & NO Marging you can sell and buy Call and Put Options, up to your Cash. You cannot do Option Spreads. Now as far as Stocks, that is new to me too. Let me know if you find out the reason.
      dffool at yahoo

    • Nathan says:

      Sounds like you are in the same position as me Polo_Mex…you and I do not have a margin account..therefore we cannot short. We are an all cash account, so we cannot be classified as day traders, and we can buy and sell as much as we want. If I open a margin account, the PDT rule will apply.

    • J says:

      PDT only applies to Margin Accounts, not Cash Accounts.

    • Andrew says:

      You have a cash account, pdt rule applies to margin accounts. In a cash account for each transaction you have to wait 3 days for the settlement before you can use the proceeds on another trade.

    • Danielle O. says:

      That is because it is a “cash account” and you have unlimited trades with the cash that has been settled. A “margin” account is where you have the PDT rule.

    • DatNewbie_001 says:

      Great question!

      I am doing research and looking at all the info I can find on stocks and trading, because I’m thinking of getting started investing and trading myself. I am by no means an expert or even close to a Newbie. I’m having concerns with this pattern day trader rule and the classification of such. Your question is remarkably similar to one of the few questions I have left. I plan on opening an account with a broker, putting CASH in and only using that until I am more comfortable with investing.

      Please if you know more about this than me feel free to correct me.

      Now maybe I can shed some light on the subject or I might be way off, but as best that I can tell PDT rules and classifications only come into play when the account (or person) in question makes trades on margin using equity that account has established.

      Equity examples as I understand them: (based on all the literature I have consumed)

      If you transfer XXX dollars into a brokerage account it takes time to clear or process or verify the deposit, while that process takes about 3 days before the deposit is realized in the account, at the moment you initiate the deposit you have the buying power of whatever XXX number of dollars the deposit is until the funds become available.

      Say you deposit $1,000 in your account on Monday. It will be 3 days until the deposit is realized, kind of like putting a pay check in the bank it takes time for it to clear and become available.
      So your $1,000 deposit in Monday will clear and be available on Wednesday, but the remainder of Monday and Tuesday you can use the $1,000 to trade and invest but those trades would be considered trades using equity and would allow you to be subject to the PDT rule if you day trade more than 3 times using that equity or buying power.
      That same equity or buying power rule applies with funds from the sale of a stock,
      Like if you sell your stock in company XYZ for a total of $3,453 which will be credited to your account instantly giving you the buying power of that total amount. But again won’t be realized for 3 days. If you trade with that buying power before realized again you open yourself up to the PDT rules.

      There is also another way to be a PDT which is to open your brokerage account as a margin account which all activity could be subject to the PDT rules.
      Now as best I can tell me and you both are dealing with cash only accounts. And from what I understand any activity from a cash only no equity account will not be subject to the PDT rule.
      There may be a few ways a cash account can be labeled as a PDT which is if you are going to be shorting stocks or dealing with options or futures.

      I really hope this is a correct way of understanding this subject as it is the basis for my plan.
      If this is any help to you that would be great. I’m trying to learn about the subject and maybe this is proof I’m actually learning the material correctly but if not and I’m wrong I hope someone who KNOWS the answer steps up to answer your question and maybe comment on my attempt at an answer.

      Basically as long as your not a margin account and you don’t use equity to trade then you won’t Be categorized as a Pattern Day Trader.

  • Madson says:

    So useful, Thank you so much for all clarifications about it! even though I am not in PDT rules is so important to get more knowledge.

    best,
    CTCstocks

  • WISHBONE says:

    BECAUSE U HAVE CASH $$$$$$

  • Jesse says:

    Hi,
    Just a question for clarification, if I were to open a long overnight and closed the position into market opening in 2 separate sell orders at different prices or had my sell order filled separately, would it still count as 1 trade or 2 trades?

  • Keith says:

    Because it’s cash account & not a margin account.

  • Steve says:

    I’m sure we have all devoted a great deal of time researching the actual text of the FINRA with respect to PDT’s. It’s honestly my opinion that several brokerages have simply followed what it seems most peers have done. That is just saying “you have to have $25,000 in your account to be a PDT!”
    I interpret what the FINRA and SEC say completely different than what I hear from so many traders and brokers.
    I’ve read pages from the FINRA website where they address PDT’s. As I’m sure most are aware, and simply put, almost all of the entire verbiage in their article describes a trader with a Margin account. The rules were put in place years ago to mainly protect the broker. There is some consideration regarding the trader, however it’s all primarily to protect the broker’s assets. It is to a certainly large degree understandable. Because of all discussion over the years, a trader can still be a PDT even if they don’t risk any money at all. Using logic, charting mentality, risk/reward awareness, a convenient time of day for many and so many other factors, a trader is still known as a PDT if they only make several small and quick trades.
    I’m sorry, but most qualifications for a PDT are dependent on whether the trades are funded by a Margin account. The evidence in that regard seems overwhelming. If there’s substantial argument from a source in higher authority than the FINRA, I would be interested in seeing it. Also, there is NO discussion of a minimum CASH account balance requirement.
    Even though I think the Margin issue makes up 90% of the decision process for brokers, I’m sure there is so much more that has been judged by both sides.
    One thing (and maybe the last thing of any importance) is the question “what about cash accounts?”. The FINRA does address the “cash only” issue. In a paragraph it states: “Day trades can occur in a cash account only to the extent the trades do not violate the free-riding prohibition of Federal Reserve Board’s Regulation T.”
    Well, I’ve looked at that too. I have read some of the SEC’s pages that FINRA links in their article. All is easily found.
    In my opinion, the SEC’s writings main concern is to explain that a cash account has cash in it. There’s virtually no discussion of margin, minimum or maximum dollars required, but something about “free-riding”. That of course is similar to check kiting, or paying a debt with another asset to avoid a loss (Ponzi scheme?) This is something that’s easily controlled with a simple explanation and signed agreement.
    Even though I’m new at it, I’ve fallen in love with trading stocks. I have a long way to go, and to me that means some small, right after opening bell, low risk, quicker trades with tight stop losses that will teach me some things more quickly. Obviously, given everything we’ve ever heard, I’m a pattern day trader…. NOT! Especially not given everything I’ve mentioned.
    I would very much love to have maybe a $5,000 cash only account somewhere, no Margin. I think FINRA and SEC allow it with MINOR adjustments.
    Like everything else we sign up for online, we sign electronically. I think if brokers put together a document explaining the cash/margin account questions ($25,000 not needed for cash but day trading allowed given the “attached “FINRA/SEC support), the free-ride issue, and whatever else you have at account funding, you would have more traders. It could even be advertised that way!

  • Amos says:

    Do the following count as overnight holds to bypass PDT:

    Buy 100 shares AAPL @ 3:59pm. Sell 100 shares AAPL @ 8:00am during Pre-market next day.

    Buy 100 shares AAPL @ 5:30pm after-market. Sell 100 shares APPL @ 8:00am during Pre-market next day.

    First example, I’m buying shares during market hours and selling them the next day during pre-market.

    Second example, I’m buying shares after-marker and selling them the next day during pre-market.

    Do these count as overnight holds to bypass the PDT rule?

    • Jose Vera JR says:

      Great question, I can see where this can get confusing. The answer is NO both examples are not considered day trades. As the article states “The “day” definition, for the purposes of pattern day trader, is a single business day—not a 24-hour period.”
      Happy trading,

  • Garry says:

    Great and article and tips laid out here. Thanks!

  • Christopher Corsi says:

    Cash accounts don’t apply to this PDT rule

  • Stacey says:

    I have a question, I realize it says 5 business days, but is that 5 consecutive days, Monday thru Friday, or could is it also if I start trading on a Wednesday to a Wednesday? I hope that makes sense. It sounds better in my head.

  • John says:

    If you get marked as a PDT on something like Robinhood, can you still place Day Trades on another cash account with another brokerage during that 90 day period?

  • curtis says:

    What if I do not close out my full position. Meaning i have 100 shares but only sell 50 in the same day is that still day trading?

  • Davis Wilson says:

    I really enjoyed to read your post. You make such an informative post.

Leave a Reply