The Pattern Day Trader (PDT) Rule: Key Takeaways
- The PDT rule is a nemesis of new traders — but it’s not the real danger…
- Day trading under the PDT can still be a good strategy if you know this first step…
- Learn my favorite afternoon pattern to cut down on your PDT worries…
Avoid the PDT by cutting down on random trades with our weekly watchlist!
If you hate the pattern day trader (PDT) rule, you’re not alone. It started as a way to protect ‘unsophisticated investors’ … Yes, that’s the official term.
Many see the PDT rule as a major barrier to entry. What’s a newbie trader to do?
Read on to learn what you’re dealing with as a trader under the PDT — and how to safely trade around it.
Table of Contents
Pattern Day Trader Rule
The government regulator, FINRA, introduced the PDT rule to keep low-net-worth traders ‘safe.’
Like many things that started as good ideas, it has some unintended consequences.
First, let’s talk about exactly what you’re dealing with…
What Is Day Trading?
Maybe you’re a small-account trader. That’s OK. We all have to start somewhere.
Having a small account means that long-term investing is less attractive than trading…
A 10% return is good for an investment. But it won’t mean much if you start out with $1,000.
Day trading can bring those types of returns within hours or minutes!
It can also lead to big losses. That’s what FINRA wanted to stop when it created the PDT rule in 2001…
When online brokers came on the scene, day trading became MUCH easier to do. People didn’t understand how fast they could blow up their accounts.
Some still don’t.
When you short a day 1 low floater, are briefly up 2 cents a share, then blow up your account. $OCGN #riskmanagement pic.twitter.com/CYjGS41JYv
— Timothy C. Bohen 🇺🇸 (@tbohen) October 9, 2019
Why Day Trade?
Day trading can be a good strategy for locking in quick gains. A quality catalyst can bump stock prices up A LOT.
The company might not hold onto those gains. Day trading helps traders safeguard gains that don’t become part of a stock’s longer-term value.
Day Trade Examples
When you open and close a position over a single trading day, that’s considered a day trade.
Simple right? Not so fast.
Traders get into trouble when they don’t count their day trades the same way FINRA does. Here are some examples of what counts as an ‘official’ day trade:
- Example 1: If you buy or short sell 100 shares of Stock X and exit your position the same day, you just day traded.
- Example 2: What about opening a 100-share position in Stock X and exiting half the position on the same day? It still counts as one day trade even though you didn’t exit all of your shares.
- Example 3: You buy or short sell 50 shares of Stock X at 9.45 a.m. Eastern, add another 50 shares at 10.15, then add 100 more shares at 11:00. You unload all 200 shares at 02.30 p.m. the same day. You have just made three day trades.
You can see how it gets tricky. This is especially true if you’re trading without a plan.
Read more about day trading here.
What Happens If You Hold a Stock Overnight?
© StocksToTrade
If you stay in a position overnight, it won’t count as a day trade.
Overnighting a stock can seem pretty attractive when you’re approaching your weekly limit under the PDT.
It’s only a smart strategy if it matches your trading plan. If you hold onto a stock that doesn’t match your plan, you’re risking more than you should.
Staying in a trade that’s going against you is one of the unintended consequences of the PDT.
There’s another scenario — one that takes advantage of a multi-day trend. This is called swing trading, and it can be a good strategy for traders under the PDT.
Swing Trade Example
Short-term positions that last more than one day are called swing trades. Unlike day trades, they don’t have an official definition.
Swing trades can last for as little as two trading days. That’s good news for fans of my favorite afternoon pattern — the VWAP-hold, high-of-day break.
This pattern checks a lot of boxes. Here are the indicators you should look for approaching the 2 p.m. Eastern window:
- Former runner
- Hot sector
- News
- Low float
- Unusual volume
- Up at least 10% for the day
- Holding VWAP
A stock that checks all of these boxes might be headed for its next leg up. Trading volume usually picks up after lunch, around 2 p.m., give or take.
What I look for with this pattern is a stock that’s at or near its high of the day. If it can hold this level until the market close, it has a good chance of gapping up overnight.
If you exit a trade like this the next morning, it won’t count against your allotment of day trades.
Like any pattern, this one doesn’t always work. That means that you always need to define your risk.
That’s another thing I like about this pattern. It gives you a clear risk to work with. If the stock falls below VWAP, it’s time to cut your losses — which will count as a day trade.
Learn more about swing trading here.
Now we need to talk about what small-account traders are up against.
What Is a Pattern Day Trader (PDT) According to FINRA?
© StocksToTrade
By FINRA’s definition, a pattern day trader has to check three boxes:
- They’re trading on margin
- They trade more than three times in a rolling five-day period
- Their day trades constitute over 6% of their total trades in the same five-day period
Let’s skip over the piece where FINRA or your broker flags you as a day trader even if you don’t check these boxes…
(This might include specialized day trader training … Make sure you speak with your broker if you think you might be caught in the PDT’s wide net.)
Here’s what the PDT designation looks like for most traders.
How Traders Get Flagged Under the PDT Rule
Most small-account traders can ignore the last part of the PDT rule.
If you make more than three day trades in a five-day period … but they’re less than 6% of your overall trades?
Then you’re overtrading in a BAD way. That would come out to about 16 non-day trades for every day trade!
The three-trade limit is what you have to watch out for.
Let’s say you make one day trade on Wednesday, another on Thursday, and a third on Friday.
You’ll have to wait till the next Wednesday to make another day trade.
The clock is still running on those Thursday and Friday trades though. You only get all three day trades back five trading days after the last of the three is complete.
What Happens if You’re Classified as a Pattern Day Trader?
The minimum equity requirement for trading as a pattern day trader is $25,000. If you have $24,999 or less in your trading account, you can trigger the PDT rule.
If you get hit with the PDT, some bad things can happen:
- You can get locked into holding a trade overnight. This can be a bad thing if the trade goes against you before the market close
- And you can get hit with a margin call
The second PDT violation is the bad one. It results in having your margin account frozen for 90 days.
So how can you avoid getting classified as a pattern day trader?
Day Trading Pro Tip: Open More Than One Trading Account
© StocksToTrade
There’s no rule against opening accounts with multiple brokerages.
This will let you make three day trades in each account within a given five-day period.
Day Trading With Two Accounts: What You Must Know
This isn’t against the law, but it can definitely get complicated.
You always need to check fees and conditions with your broker. Double up on brokers and you give yourself double the work — at least.
Want to Learn to Day Trade Like a Pro?
Learning to build good trading plans should be the first step in any strategy. Luckily, this is what we do every day on the SteadyTrade Team.
Every morning and afternoon, I break down potential trades and discuss trading plans. This mentorship program was designed with traders under the PDT in mind.
Apply to become a member of the SteadyTrade Team here!
Conclusion
The PDT is a boogeyman for new traders…
For me, it’s just another rule to follow. And it isn’t the most important one.
As a new trader, you should be more concerned with process than profit. So get that $25,000 figure out of your head.
Learn to trade the right way first. Getting over the PDT should be another milestone on the way to your bigger goals!
Feeling better about the PDT rule? Still have questions? Let me know in the comments!
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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!
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
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.
PDT only applies to Margin Accounts, not Cash Accounts.
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.
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.
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.
Great info to avoid being classified as a Day Trader, but how the f c do you ever get off the classification. I am very frustrated I got on this bullshit classification, with someone telling me how many trades I can do in a specific amount of time, or they change all the rules for us. I would love to know how I get off this classification. Thanks, KORY
Best to contact your broker and ask, many brokers will “forgive” you once. Good luck!
Cash accounts have cash settlement rules which require 2-3 days before you can trade that position.
POLO_Mex, the previous comments are correct: it’s because you’re trading in a cash account instead of using margin. If you read the SEC fine print, the PDT designation was created specifically to minimize the risks that arose when many traders began abusing margin; consequently, PDT is irrelevant to cash accounts because trading with your own cash poses no margin risks for your site to be nervous about. Robinhood is the exception since they’re too ignorant to know the difference.
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
BECAUSE U HAVE CASH $$$$$$
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?
Because it’s cash account & not a margin account.
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!
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?
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,
Great and article and tips laid out here. Thanks!
Cash accounts don’t apply to this PDT rule
So I can trades as much as I want using only my cash and not be considered a PDT?
Yes, but your cash will take 3 days to settle after you close your trades. So even if you’re not being limited by PDT, you’ll quickly be limited by available cash on hand to trade with.
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.
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?
Nice Post !!
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?
I really enjoyed to read your post. You make such an informative post.
Why not just open a cash account. I have an account without a margin and I can day trade until I puke and it’s not a problem.
If I buy shares of a ticker and if it ramps up I were to scale back my position size, selling 3 times, does it count as 1 trade or 4 trades?
Please advise on Example 3 (it should be 1-trade, not 3-trade)
Here is an example:
Multiple Buys & Sells
You start with 0 shares of ABC stock.
Buy 1 ABC
Buy 2 ABC
Buy 7 ABC
Sell 1 ABC
Sell 5 ABC
Sell 4 ABC
This is one day trade because there is only one change in direction between buys and sells.
Hi,
Is this scenario considered a PDT criteria:
Buy XYZ after market (post market for example 4:15 PM EST)
SELL XYZ after market (post market for example 6:30 PM EST)
Buy and sell in the same after hours session. Or the same pre-market session.
Thanks
Lets say I have had 20 shares of apple since april 3 at 10 am, but on april 6 at 12 pm I decide I want to buy shares in a new stock, so at 12 pm I buy 100 shares of Disney, but then at 1 pm on april 6 I decide to sell my shares of Apple, that wouldnt be considered a day trade since I didnt buy and sell the same stock in the same day right? I bought and sold two completely different stocks from a different day. Basically the main question is am I allowed to buy and sell two completely different stocks in the same day, as long as I dont buy and sell the same stock in the same day. Sorry if this sounds confusing LOL.
The “Example 3” is incorrect. You can “build in” to position buy adding shares incrementally.
Buy 20 shares @ $5.00, 20 Shares @ $5.25, 20 Shares @ $5.50 and 20 Shares @ $5.75 and then sell 80 shares at $6.00 is not 3 day trades. This is one trade. Once you sell the equity it counts as a day trade. They allow you to buy in little by little. This allows you to buy in low and build a profit cushion. You can add more as the price increases. Your initial profit margin acts as a cushion should the price drop after the 2nd (20) shares are bought. This allows for a dip without hitting your stop. Always have a STOP in place. Don’t take big losses, especially with small accounts. Keep risk in the 1%-2% range until you show yourself you know what you’re doing. You must “earn” the right to increase risk after a few months.
So let’s say I use all my day trades. Now I won’t have a day trade for another 5 days. Can I buy a stock today and sell it tomorrow even though I don’t have a day trade?
Very clear and easy to understand. Thank you so much! You’re are great and knowledgeable.
Hello
Quick question>Dose canceled Limit sell order on same day long position counts as a day trade???
Appreciate your help.
thanks
Matt
I bought a stock a day before, and kept it overnight I waited until mid day, so I gain on the sale, what happens if I buy after market the same day I sold? is this a day trade?