Most Popular
1. It’s a New Macro, the Gold Market Knows It, But Dead Men Walking Do Not (yet)- Gary_Tanashian
2.Stock Market Presidential Election Cycle Seasonal Trend Analysis - Nadeem_Walayat
3. Bitcoin S&P Pattern - Nadeem_Walayat
4.Nvidia Blow Off Top - Flying High like the Phoenix too Close to the Sun - Nadeem_Walayat
4.U.S. financial market’s “Weimar phase” impact to your fiat and digital assets - Raymond_Matison
5. How to Profit from the Global Warming ClImate Change Mega Death Trend - Part1 - Nadeem_Walayat
7.Bitcoin Gravy Train Trend Forecast 2024 - - Nadeem_Walayat
8.The Bond Trade and Interest Rates - Nadeem_Walayat
9.It’s Easy to Scream Stocks Bubble! - Stephen_McBride
10.Fed’s Next Intertest Rate Move might not align with popular consensus - Richard_Mills
Last 7 days
US Presidential Election Year Stock Market Seasonal Trend - 29th Nov 24
Who controls the past controls the future: who controls the present controls the past - 29th Nov 24
Gold After Trump Wins - 29th Nov 24
The AI Stocks, Housing, Inflation and Bitcoin Crypto Mega-trends - 27th Nov 24
Gold Price Ahead of the Thanksgiving Weekend - 27th Nov 24
Bitcoin Gravy Train Trend Forecast to June 2025 - 24th Nov 24
Stocks, Bitcoin and Crypto Markets Breaking Bad on Donald Trump Pump - 21st Nov 24
Gold Price To Re-Test $2,700 - 21st Nov 24
Stock Market Sentiment Speaks: This Is My Strong Warning To You - 21st Nov 24
Financial Crisis 2025 - This is Going to Shock People! - 21st Nov 24
Dubai Deluge - AI Tech Stocks Earnings Correction Opportunities - 18th Nov 24
Why President Trump Has NO Real Power - Deep State Military Industrial Complex - 8th Nov 24
Social Grant Increases and Serge Belamant Amid South Africa's New Political Landscape - 8th Nov 24
Is Forex Worth It? - 8th Nov 24
Nvidia Numero Uno in Count Down to President Donald Pump Election Victory - 5th Nov 24
Trump or Harris - Who Wins US Presidential Election 2024 Forecast Prediction - 5th Nov 24
Stock Market Brief in Count Down to US Election Result 2024 - 3rd Nov 24
Gold Stocks’ Winter Rally 2024 - 3rd Nov 24
Why Countdown to U.S. Recession is Underway - 3rd Nov 24
Stock Market Trend Forecast to Jan 2025 - 2nd Nov 24
President Donald PUMP Forecast to Win US Presidential Election 2024 - 1st Nov 24
At These Levels, Buying Silver Is Like Getting It At $5 In 2003 - 28th Oct 24
Nvidia Numero Uno Selling Shovels in the AI Gold Rush - 28th Oct 24
The Future of Online Casinos - 28th Oct 24
Panic in the Air As Stock Market Correction Delivers Deep Opps in AI Tech Stocks - 27th Oct 24
Stocks, Bitcoin, Crypto's Counting Down to President Donald Pump! - 27th Oct 24
UK Budget 2024 - What to do Before 30th Oct - Pensions and ISA's - 27th Oct 24
7 Days of Crypto Opportunities Starts NOW - 27th Oct 24
The Power Law in Venture Capital: How Visionary Investors Like Yuri Milner Have Shaped the Future - 27th Oct 24
This Points To Significantly Higher Silver Prices - 27th Oct 24

Market Oracle FREE Newsletter

How to Protect your Wealth by Investing in AI Tech Stocks

What you need to know about the PDT rule

InvestorEducation / Learn to Trade May 09, 2019 - 01:00 PM GMT

By: Submissions

InvestorEducation

One of the most ignored subjects in stock trading is the PDT rule. However, it is unimaginable how the rule can get you into trouble especially if you are not ready to meet the basic requirements.  In this article, we are going to break down what a PDT is and the rules that govern pattern day trading.


What is pattern day trading?

A pattern day trader is any stock trader who executes 4 or more day transactions within five days. This is provided that the amount of trade amounts to over 6% of the total margin account that the customer has traded on in the 5 business days.

It is however important to note that pattern day trader rules only apply to margin accounts. This means that only people trading on credit get affected by the rule. On the other hand, those who trade on a cash account are immune to this rule. However, if you trade with both cash and margin accounts the rules could apply if you meet the PDT threshold.  

Pattern day trader requirements

If you surpass the PDT threshold and be labeled as a PDT, there are some things that you need to know. Being a PDT is not a bad thing after all especially if you have the money to meet the floor. You however need to have about $25,000 in your brokerage account so that it can be used as a baseline security. However, the amount is required to remain above $25,000 or you risk having the account frozen. However, once you are operating a cash account, the threshold will not apply to you.  

The other part of a pattern day trader requirement is the trading deadline requirement. To be classified as a pattern day trader, you’re buying and selling of stock need to take place in the same business day. For example, if you buy in the morning and sell before the stock closes, then such transactions are considered as a day trade.  If you do this 4 times within a five day period, your margin account will fall under the pattern day trader rules. Therefore, you should be ready with your $25k to avoid this situation

On the other hand, it is important to note that both your gains and losses as a pattern day trader needs to exceed 6% of your total equity. This is to ensure that your profit or losses counts in your overall pattern day trade tally.

How to avoid being classified as a PDT

There are several ways of avoiding being classified as a PDT. First, if you complete two day trades in one, it is advisable to wait for another business day before continuing with your trade. Failure to do that will subject you to the PDT rule which will have adverse effects on your future stock trading endeavors.

Alternatively, you may consider getting cash account.  It is important to note that PDT rules only apply to those operating margin accounts. However, if you are not willing to push credit around, you could trade with a cash account and this will present you with a chance to avoid the PDT rule. And since your equity is cash, putting your account below the $25k mark will not subject you to the PDT rules. This means that, the account will not be frozen as is the case with a margin account.

If you still wish to continue with a margin account, there are other steps that you can take to avoid the pattern day trader rules. You should either try to extend your trades or stay within the 4 transactions limit. To be safe, you can easily do 3 trades within the week without triggering the $25k threshold.

What happens after you are labeled as a pattern day trader?

If you happen to be classified as a pattern day trader, there is some thing that you should open your mind to in order to close the restrictions. As a PDT, if you close a deal on the same day, you will have to wait for several days to access the physical funds. This is like depositing a check at the ATM when the branch has closed. And although you will still use the funds, you will have to wait longer for it to clear.

Conclusion

If you do not want to tie up over $25k in your margin account, you should really try to avoid the pattern day trader rule.  Tied money in your margin account will not be helpful as it cannot make you money. However, if you spread the timeline for completing transactions for a few weeks or months, you will be able to avoid the pattern day trader rule. With those wide timelines, you can complete your transactions without worrying that you will exceed the limits.

By Helen Bell

© 2019 Helen Bell - All Rights Reserved

Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2022 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in