Almost all new traders find the pattern day trader rule to be a huge inconvenience. One of the most common questions I get asked is what is a pattern day trader rule workaround?
The good news is there are a few options. But let’s start with the basic, what is the pattern day trader rule (PDT rule)? And where did it come from?
The History of the Pattern Day Trader Rule
During the dot-com bubble of the early 2000s, a lot of people decided to try day trading. Sound familiar?
When the bubble eventually burst, a lot of people lost all their money.
So regulators at the Federal Government imposed new rules on day traders. They made it so any margin account with a balance under $25,000 could only make three day trades every five business days.
Let’s understand the rules first. Then we can explore the pattern day trader rule workaround.
What is a Day Trade?
A day trade is any trade opened and closed on the same calendar day. If you hold overnight, it’s not a day trade. But pre-market and after-hours trading still count as a day trade if it’s the same day.
What is a Margin Account?
A margin account allows you to borrow from your broker. You can borrow money and trade bigger position sizes. And you can borrow shares if you want to short sell (bet against) a stock.
Now that we’ve got an understanding of the rules of trading. Let’s get to the real reason you’re here…
Pattern Day Trader Rule Workaround
There are a few options … I’ll explain each one and give you the pros and cons so you can make the best decision for yourself.
The broker, not FINRA, enforces the PDT rule. So if you divide up your cash into multiple accounts, you can increase your trades per week.
With two accounts, you get six day trades every five days. Three accounts will allow you to have nine trades every five days.
This method still caps your total trades. So you’ll have to factor that into your decision.
It can be a bit inconvenient moving between brokers constantly. And you’ll probably want to rebalance your accounts from time to time. They’re bound to get out of whack after a while.
If you short sell or trading large positions, this is the best option.
The next option is my preferred method. I used it for months when I first started live streaming.
Remember, the PDT rule only restricts margin accounts. Which is the default kind of account most brokers start you with.
But brokers will be happy to switch your account to a cash account if you ask them to.
Cash accounts do have a disadvantage … you have to wait for your cash to settle.
After you trade, it takes two days for your cash to settle in your account. While you’re waiting for that cash to settle, you have less cash available to trade with.
For example, say you have a $10,000 account. On Monday, you make six day trades, each one for $1,000. So you used $6,000 total.
On Tuesday, you’ll only have $4,000 available to trade with. On Wednesday, the $6,000 you traded on Monday will be available for you to trade with again.
This method is perfect if you’re trading small positions and only going long (buying) stocks.
But you’ll have to keep careful track of how much you trade, so you leave yourself with some cash for the next trading day.
When I was below the PDT rule, this is the method I used. To avoid overtrading I only traded the first hour of the day.
The last method is the least preferred. It’s the most costly and carries the most risk. But I want to make sure you have all the information about the available options.
Brokers that are not located inside the United States are not subject to the PDT rule.
But there are risks involved in using these accounts. In 2019, the Bahamian broker SureTrader was suspended for five days.
During that time, users had no access to their funds, no ability to trade. No one knew if they’d even get their money back. After about a week, the broker was unfrozen, and people could reaccess their funds and trade again.
I mentioned SureTrader, which is the most well-known offshore broker. I used it for a little bit but found that the fees and commission are very high.
You can search for SureTrader on your own. I don’t believe it to be the best option for traders, so I’m not providing a link.
You Can Workaround the PDT Rule
You have some options while you grow your account.
But the best way to get around the rule is to build your account up over $25,000.
I started below the PDT rule and had to find what worked best for me. I used all three methods at different points. I found the most consistency using a single cash account.