Pattern Day Trader

Pattern Day Trader

6 min read

What is the pattern day trader or pdt rule and how do you get around it? Though the Financial Industry Regulatory Authority introduced the rule to protect traders, the pdt rule severely limits new day traders. It only allows traders to make 3 day trades in a 5 calendar day period if they have less than $25,000 in an account. Many traders consider it a significant barrier to entry, stopping you before you even start. 

First thing first, let’s talk about what exactly a day trade is. In short, a day trade can be two transactions on the same financial instrument on the same trading day. If you buy and sell or short and buy back a security within a day, it’s considered a day trade. Finally, any positions held overnight are not considered a day trade. 

If you don’t want to be under the pattern day trader rule, you’ll need to have $25,000 in your account. Otherwise, you’ll be restricted to 3 day trades in a 5 calendar day trading period. However, that’s not necessarily a bad thing. It can help you from blowing up your account when you’re new. 

Calculating the Number of Trades

If you’re still a bit unclear, here are some examples to help you understand:

  • If you enter one buy order for 4000 shares and sell two, 2000 share orders, these three trades count as one day trade.
  • The reverse of the example above is also true. If you buy 2000 shares in two separate orders and close your position in one order of 4000 shares, it’s considered one day trade.
  • Alternatively, if you place two 400 share trade orders and closed with two 400 share orders, it counts as two, day trades. It counts as two separate day trades as you have two transactions at either end.

What Are the Pattern Day Trader (PDT) Rules?

If I had to describe the PDT Rules, I’d liken it to swimming in handcuffs. Many see the PDT rule as a horrific stifling of trader activity. Unfortunately, the PDT rule doesn’t allow for more than 3, day trades in five days for trading accounts under $25,000. Under the said rule, a day trader must maintain minimum equity of $25,000 if day trading four or more times within five business days (5-day rolling period) with a margin account.

Furthermore, the number of day trades is more than six percent of the customer’s total trading activity for that same five-day period. 

Time Is Not on Your Side

Let’s be honest; we’d all love to start day trading with a minimum of $25,000. Reality is, the average trader typically doesn’t have that amount of money to trade.

You could limit your intraday trading activities to no more than three trades a week. Alternatively, you could also trade using a cash account without any leverage until you grow it enough to meet the $25,000 requirement. But, this can and most likely will, take time.

Broken Down in 30 Seconds

  • A pattern day trader is one who “day-trades four or more times in five business days, and the day-trading activity is greater than six percent of the total trading activity for the same five-day period.”
  • To avoid PDT designation, you need $25,001 in your trading account. Take note; this money needs to stay in your account for two business days after you close your final trade.
  • The PDT rule only applies to day trading stocks and options.

How to Overcome the Pattern Day Trader (PDT) Rule

Is Pattern Day Trading Illegal?

  • Pattern day trading is not illegal. However, the US government is of the believe that it’s really risky. Hence the PDT rule now in place. I guess they’re trying to save us from ourselves. Which can be good if we’re paying those day trading taxes.

Why You Should Consider Day Trading Futures

You don’t need $25,000 in your account to day trade futures. Luckily, the Pattern Day Trader rule does not apply to day trading futures. 

As a matter of fact, the rule only applies to day trading stocks and options. In futures and Forex traders can open and close as many trades as they like within a single day, trading without restriction subject to margin requirements.

So what about E-mini futures and why should all new traders trade the micro E-mini futures? At 1/10th the size of the E-minis, Micro E-mini Futures allow traders to access highly liquid index markets with reduced costs. You want to protect your account right?

Five Reasons to Trade the Micro E-Mini Futures

  • Lower risk: 
    • $50 margins
    • $5 point value
    • $1.25 tick value
  • Low barriers to entry
    • You can get started with NinjaTrader for as little as $400
  • Round the clock trading
    • No need to be glued to your computer between 9:30 am and 4:00 pm
  • Highly liquid
  • Access to the most popular markets (S&P 500, NASDAQ 100, Dow Jones Industrial Average, Russell 2000)
  • Substantial tax advantages

I Got Around the Pattern Day Trader Rule, Now What?

You want to make money. But how is that even possible with the hundreds of strategies and indicators available? Whether we’re buying a box of crackers or trying to pick a day trading strategy, our everyday decisions, both big and small, have become increasingly complex due to the overwhelming abundance of choice presented to us. 

That’s why I say; less is more when it comes to day trading. Contrary to popular belief, trading stocks doesn’t need to be complicated. 

You literally have hundreds of different strategies at your fingertips, and all are profitable under the right conditions.

But your job isn’t to trade them all; your job is to master one or two of them. The reality is, there is no best strategy among them; there is no right or wrong answer.

You just need to find the one strategy that works best for you. Personally, some of my favorite strategies to trade are VWAP, opening range breakouts, and the ABCD pattern.

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