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Pattern Day Trading Rule: What Is It and How to Avoid It?

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Written by Timothy Sykes
Reviewed by Friedrich Odermann Fact-checked by Ed Weinberg
Updated 11/24/2023 13 min read

The pattern day trader (PDT) rule limits the amount of roundtrip stock orders that traders with less than $25,000 in their brokerage accounts are able to trade. How do you get around it — besides for saving up with the purposes of stacking that much cash? That’s what we’re going to discuss today…

I’ve been teaching for over a decade, and this is one of the questions I get most often. In my experience, rules like this become a bit of a bogeyman for beginner traders…

I think the PDT rule is misunderstood. I think it’s actually a good thing.

If you can’t get over the PDT with three day trades in your pocket, by all rights I don’t think you should get more…

The trading world is littered with examples of small account traders who tried to run before they could walk…

Don’t let it happen to you!

What is the Pattern Day Trading (PDT) rule, and how can you avoid falling foul of it? Let’s dive in and find out.

What Is the PDT Rule?

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The PDT rule limits the number of day trades that traders with less than $25,000 in their brokerage accounts are able to make in a week. To comply with the PDT rule, traders must ensure they do not exceed the allowed number of day trades within a five-day period unless they maintain the required account balance.

The PDT rule is a significant aspect of day trading, but it’s not the only thing you need to understand. To fully grasp the intricacies of day trading, you need to delve into its core concepts. This includes understanding the basics of day trading, which you can learn more about in this comprehensive guide on Day Trading. By understanding these basics, you can navigate the trading landscape more effectively, even with the constraints of the PDT rule.

Check out this video for a quick overview:

Background on the PDT Rule

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The Financial Industry Regulatory Authority (FINRA) enforces the PDT rule to restrict excessive risk-taking in day trading. It states that traders who make four or more margined day trades within five business days are considered pattern day traders.

These traders are required to maintain a minimum account balance of $25,000.

The Evolution of the PDT Rule

The PDT rule has evolved over time to “protect” investors and maintain the security of the market. Traders must abide by the stringent measures in place to regulate market integrity and trader safety.

It was designed to curb excessive trading and limit the risks associated with day trading.

Understanding the Role of a Pattern Day Trader

A pattern day trader is a trader who executes four or more day trades within five business days. These trades must represent more than 6% of the trader’s total trades in the margin account for the same period.

Pattern day traders must follow the guidelines around minimum equity, or else limit their day trades. It’s crucial for traders to observe the PDT rule carefully to avoid potential penalties and account restrictions.

Key Restrictions Associated with the PDT Rule

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The PDT rule imposes several restrictions on pattern day traders. These include a minimum equity requirement of $25,000 and a limit on the number of day trades that can be made within a five-day period.

Crucial Requirements for Pattern Day Traders

Pattern day traders must maintain a minimum account balance of $25,000 on any day that trades are made. They are also required to keep this minimum balance in their account for two business days after the day of the last trade.

Adhering to the $25,000 minimum account balance is essential for pattern day traders to continue their trading activities without interruption.

An Overview of Cash Accounts in Context of PDT Rule

Cash accounts are a type of brokerage account where you must pay for all purchases in full by the settlement date. In the context of the Pattern Day Trading (PDT) rule, cash accounts can be a viable option for traders who wish to avoid this rule. The PDT rule, which requires a minimum equity of $25,000 for accounts that execute four or more day trades in five business days, does not apply to cash accounts. This means that traders using cash accounts are not restricted in their number of day trades.

While cash accounts can help you navigate around the PDT rule, they have their own limits. For those starting with a smaller account, this guide on Small Account Trading can provide valuable insights on how to grow your account over time.

Significance of Cash Accounts in Pattern Day Trading

Cash accounts play a significant role in pattern day trading. Unlike margin accounts, cash accounts are not subject to the PDT rule. This means that traders using cash accounts can make as many day trades as they want, as long as they have sufficient cash in their account to cover the trades.

Advantages of Retaining a Cash Account When Trading Stocks

There are several advantages to using a cash account for stock trading. These include the ability to make unlimited day trades (as long as you have sufficient cash), no minimum account balance requirement, and no risk of receiving a margin call.

Lowering Risk Level Through Cash Accounts

Cash accounts can also help lower the risk level in day trading. Since you’re only trading with the cash you have in your account, you’re not borrowing money to trade, which can reduce your potential losses.

Analyzing the Shortcomings of Using Cash Accounts for PDT

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While cash accounts can help traders avoid the PDT rule, they come with their own set of limitations. One of the main drawbacks is the T+2 rule, which requires traders to wait two business days after a trade for the transaction to settle before the funds can be used again. This can limit the trading activity of day traders who wish to execute multiple trades per day. Additionally, cash accounts do not provide access to margin, limiting the buying power of the trader.

Drawbacks of Maintaining a Cash Account for Pattern Day Trading

While cash accounts offer several advantages, you still need to supervise your trading activity. Drawbacks include the T+2 rule for settling trades, which can limit your trading activity, and the inability to short sell stocks.

The Limitation of Leverage in a Cash Account

Another drawback of cash accounts is the lack of leverage. Leverage allows traders to borrow money to trade larger positions, which can amplify profits. However, it can also amplify losses, so it’s a double-edged sword.

Restriction on Short Selling Via a Cash Account

Cash accounts also restrict short selling, a strategy where traders borrow shares to sell them with the hope of buying them back at a lower price. This strategy can be profitable in a declining market, but it’s not possible with a cash account.

Delving Deeper into the Influence of PDT Rule on Trading Activity

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The PDT rule can have a significant impact on a trader’s activity. By limiting the number of day trades that can be executed within a five-day period, it can restrict a trader’s ability to take advantage of short-term market fluctuations.

Regular review of trading practices can help traders adapt to the limitations imposed by the PDT rule. Conducting an audit of account funds, both unsettled and settled, is crucial to verify your compliance.

Impacts of the PDT Rule on Your Trading Operations

The PDT rule can significantly impact your trading operations. It limits the number of day trades you can make in a five-day period, which can restrict your trading activity. It also requires you to maintain a minimum account balance of $25,000, which can be a significant barrier for some traders.

Traders need to track and monitor their day trade count diligently to control their exposure to the PDT rule.

The Role of Marginable and Non-Marginable Securities in the PDT Rule

Marginable and non-marginable securities also play a role in the PDT rule. Marginable securities can be purchased on margin, meaning you can borrow money from your broker to buy them. Non-marginable securities, on the other hand, must be fully paid for. The PDT rule applies to trades involving marginable securities.

Distinguishing Unsettled and Settled Funds in Light of the PDT Rule

Understanding the difference between unsettled and settled funds is also important in the context of the PDT rule. Unsettled funds are the proceeds from a sale that have not yet been cleared for use, while settled funds are available for trading. The PDT rule applies to trades made with settled funds in a margin account.

Strategic Approaches to Navigate the PDT Rule

Navigating the PDT rule requires strategic planning and careful consideration of your trading habits and capital.

Implementing a well-thought-out trading strategy can help traders manage the constraints of the PDT rule effectively.

One approach is to use a cash account to avoid the rule altogether, although this comes with its own limitations. Another strategy is to spread your trades out to avoid hitting the four-trade limit within five business days.

Navigating the PDT rule requires a strategic approach, but it’s equally important to understand the basics of day trading. Whether you’re a beginner or an experienced trader looking to refresh your knowledge, this guide on Day Trading Basics can be a valuable resource. It covers everything from trading strategies to risk management, helping you build a solid foundation for your trading journey.

Alternatively, traders can consider other forms of trading, such as swing trading or futures trading, which are not subject to the PDT rule. Ultimately, the best approach depends on your individual trading goals, risk tolerance, and financial situation.

Employing a Cash Account for Day Trading

One strategy to navigate the PDT rule is to use a cash account for day trading. This allows you to make unlimited day trades, as long as you have sufficient cash in your account to cover the trades.

Exploring Futures Trading as an Alternative

Futures trading can be another alternative to navigate the PDT rule. Futures are not subject to the PDT rule, and they offer high leverage and the ability to profit from both rising and falling markets.

Understanding how the PDT rule governs day trading activities is essential when exploring alternatives like futures trading.

Advantages of Options Trading in Relation to the PDT Rule

Options trading can also be advantageous in relation to the PDT rule. Like futures, options are not subject to the PDT rule. They also offer leverage and the ability to profit in various market conditions.

Key Takeaways on PDT Rule and Cash Accounts

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Understanding the PDT rule and the role of cash accounts in day trading is crucial for any trader.

The PDT rule, while designed to protect traders, can limit trading activity and requires a significant minimum account balance. Cash accounts, on the other hand, offer the freedom to make unlimited day trades, but come with their own set of restrictions. Balancing these factors and choosing the right approach can help you navigate the world of day trading successfully.

Trading isn’t rocket science. It’s a skill you build and work on like any other. No matter the goals you have in mind, smart trading can help you get there. Trading has changed my life, and I think this way of life should be open to more people…

I’ve built my Trading Challenge to pass on the things I had to learn for myself. It’s the kind of community that I wish I had when I was starting out.

We don’t accept everyone. If you’re up for the challenge — I want to hear from you.

Apply to the Trading Challenge here.

Trading is a battlefield. The more knowledge you have, the better prepared you’ll be.

Are you struggling to get over the PDT? Let me know in the comments — I love hearing from my readers!

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Author card Timothy Sykes picture

Timothy Sykes

Tim Sykes is a penny stock trader and teacher who became a self-made millionaire by the age of 22 by trading $12,415 of bar mitzvah money. After becoming disenchanted with the hedge fund world, he established the Tim Sykes Trading Challenge to teach aspiring traders how to follow his trading strategies. He’s been featured in a variety of media outlets including CNN, Larry King, Steve Harvey, Forbes, Men’s Journal, and more. He’s also an active philanthropist and environmental activist, a co-founder of Karmagawa, and has donated millions of dollars to charity. Read More

* Results are not typical and will vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk. See Terms of Service here

The available research on day trading suggests that most active traders lose money. Fees and overtrading are major contributors to these losses.

A 2000 study called “Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors” evaluated 66,465 U.S. households that held stocks from 1991 to 1996. The households that traded most averaged an 11.4% annual return during a period where the overall market gained 17.9%. These lower returns were attributed to overconfidence.

A 2014 paper (revised 2019) titled “Learning Fast or Slow?” analyzed the complete transaction history of the Taiwan Stock Exchange between 1992 and 2006. It looked at the ongoing performance of day traders in this sample, and found that 97% of day traders can expect to lose money from trading, and more than 90% of all day trading volume can be traced to investors who predictably lose money. Additionally, it tied the behavior of gamblers and drivers who get more speeding tickets to overtrading, and cited studies showing that legalized gambling has an inverse effect on trading volume.

A 2019 research study (revised 2020) called “Day Trading for a Living?” observed 19,646 Brazilian futures contract traders who started day trading from 2013 to 2015, and recorded two years of their trading activity. The study authors found that 97% of traders with more than 300 days actively trading lost money, and only 1.1% earned more than the Brazilian minimum wage ($16 USD per day). They hypothesized that the greater returns shown in previous studies did not differentiate between frequent day traders and those who traded rarely, and that more frequent trading activity decreases the chance of profitability.

These studies show the wide variance of the available data on day trading profitability. One thing that seems clear from the research is that most day traders lose money .

Millionaire Media 66 W Flagler St. Ste. 900 Miami, FL 33130 United States (888) 878-3621 This is for information purposes only as Millionaire Media LLC nor Timothy Sykes is registered as a securities broker-dealer or an investment adviser. No information herein is intended as securities brokerage, investment, tax, accounting or legal advice, as an offer or solicitation of an offer to sell or buy, or as an endorsement, recommendation or sponsorship of any company, security or fund. Millionaire Media LLC and Timothy Sykes cannot and does not assess, verify or guarantee the adequacy, accuracy or completeness of any information, the suitability or profitability of any particular investment, or the potential value of any investment or informational source. The reader bears responsibility for his/her own investment research and decisions, should seek the advice of a qualified securities professional before making any investment, and investigate and fully understand any and all risks before investing. Millionaire Media LLC and Timothy Sykes in no way warrants the solvency, financial condition, or investment advisability of any of the securities mentioned in communications or websites. In addition, Millionaire Media LLC and Timothy Sykes accepts no liability whatsoever for any direct or consequential loss arising from any use of this information. This information is not intended to be used as the sole basis of any investment decision, nor should it be construed as advice designed to meet the investment needs of any particular investor. Past performance is not necessarily indicative of future returns.

Citations for Disclaimer

Barber, Brad M. and Odean, Terrance, Trading is Hazardous to Your Wealth: The Common Stock Investment Performance of Individual Investors. Available at SSRN: “Day Trading for a Living?”

Barber, Brad M. and Lee, Yi-Tsung and Liu, Yu-Jane and Odean, Terrance and Zhang, Ke, Learning Fast or Slow? (May 28, 2019). Forthcoming: Review of Asset Pricing Studies, Available at SSRN: “https://ssrn.com/abstract=2535636”

Chague, Fernando and De-Losso, Rodrigo and Giovannetti, Bruno, Day Trading for a Living? (June 11, 2020). Available at SSRN: “https://ssrn.com/abstract=3423101”