Today, we’re going to look at how to avoid PDT rule. If you are an active trader, chances are you come up against the pattern day trader rule.
Contents
- What is the PDT Rule?
- How do I Avoid It?
- Best Brokers to Avoid the PDT Rule
- Are There Any Other Options?
- Concluding Remarks
Chances are if you are a frequent trader with a small account, you may have come under restrictions because of the PDT Rule.
This article will help answer the question of what the PDT Rule is and why it is in place.
We will then discuss how to avoid the PDT rule in your trading.
What Is The PDT Rule?
PDT stands for Pattern Day Trader.
The PDT rule is a regulatory rule for traders who place more than 4-day trades within a 5-day period.
A day trade counts as a trade that is opened and closed on the same business day.
The PDT rule can be a major annoyance for small investors.
This is because it is waived for traders with more than $25,000 in their margin account.
Any less and you are out of luck.
Even with accounts with more than $25,000 the PDT rule will apply whenever the balance drops below this level.
Potentially leaving your account restricted and yourself handcuffed in a market correction.
Before you think Wall Street is against you, remember this.
The rule itself is designed as a precautionary measure designed to protect smaller (often uneducated) investors from losing money and potentially becoming addicted to trading.
This would be in the same way that states have different gambling and sports betting restrictions in place to avoid the same thing.
So, debate away whether it is right or wrong.
I personally believe the government could put in a type of online test which could allow the PDT to be waived.
Though there are no shortages of opinions on both sides to what should happen.
Let’s work with what we have for now.
Source: Trade Education
How Do I Avoid It?
The easiest way to avoid the PDT rule is simply change your account to a cash account.
Although this can prevent you from getting leverage and executing certain types of trades.
Alternatively, by holding trades overnight they are avoided as being classified as day trades, thus not counting to your total.
Thus, being tactical using day trades can make sense.
If your strategy revolves around day trading though this is little help.
Of course, making sure you have greater than $25,000 in your account is easy advice.
Though understandably anyone can give advice to solve life’s problems with more money.
You still must get it in the first place!
Barring getting rich, one way to avoid the PDT rule is to change your broker.
This is because it is a broker’s job to flag accounts who violate the PDT rule.
For all major brokers such as Robinhood, TD Ameritrade and Interactive Brokers they will do this.
This is because they are subject to US law.
Yet other brokers not domiciled in the US and operating outside of the US regulations can do as they please.
Opening an account with them can often allow you to trade as frequently as you like, even with a smaller account.
Best Brokers To Avoid The PDT Rule
Now there is one major disadvantage to choosing an offshore broker.
Being outside US jurisdiction is a double-edged sword. Sure, you avoid the PDT rule, but it can leave you at the expense of losing other critical investor protections.
If you want to take this risk, it is important to really do due diligence to find the best and most reputable brokers that are offshore to try to minimize this risk.
Some of the names that I have heard recommended are IG, CMG markets and Trade Zero.
If you go this route, it is important to do full due diligence. Good questions to ask are:
- How long has this company been established?
- What are their assets under management?
- Are they regulated by any other investment body?
- Are clients generally satisfied?
- Do they satisfy your trading needs?
It is easy to go online and find other articles, recommending the best offshore brokers.
The issue with these is that there is almost always a conflict of interest.
The writer often receives referral income from a few of these brokers so will naturally write more favorably of them.
If things hit the fan, don’t expect him to be there to have your back.
So, let’s leave the referral links aside!
Are There Any Other Options?
“I want to try my luck in trading but because of the PDT rule I am unable to try out my strategy. I only want to invest with a small amount of money as I just want to try it out to see if it is profitable, what should I do?”
This is a frequent question.
The best way to try out a strategy is to paper trade it first. Anyone can open a paper account and guess what? No trade limits.
So, you can trade away and really test to see if your strategy is profitable.
All while avoiding putting your money at risk, racking up pesky commissions and avoiding the PDT rule.
If you find it is profitable then you can feel more confident trading it with your real money, if not you didn’t lose anything trying.
This is a great alternative that a lot of new traders do not consider.
Concluding Remarks
The PDT rule can be frustrating and annoying.
Despite this there are several ways to get around the rule.
These include switching over to a cash account, depositing more funds, switching to an offshore broker or paper trading.
While none of these options is perfect, they offer some alternatives which can allow you to work around it while not sacrificing returns or strategy development.
Trade safe!
Disclaimer: The information above is for educational purposes only and should not be treated as investment advice. The strategy presented would not be suitable for investors who are not familiar with exchange traded options. Any readers interested in this strategy should do their own research and seek advice from a licensed financial adviser.
