What is the PDT (Pattern Day Trader) rule?
WHAT IS THE PDT RULE?
It isn’t long before anyone who is interested in day trading stumbles upon this goofy acronym… “PDT”. So, what is it? How does it affect you? And what can we do about it? Great questions let’s dig in!
The PDT (Pattern Day Trader Rule) is a rule enforced by the SEC that applies to all U.S. citizens. This rule prevents you from making more than 3-day trades in a 5-day rolling period IF you have under $25,000 USD in your trading account.
Who is the SEC and why do they get to have a say in this? Well, the SEC (Securities and Exchange Commission) “is a U.S. government agency that oversees securities transactions, activities of financial professionals and mutual fund trading to prevent fraud and intentional deception.”
So... basically, think of them as the boss. They make the rules. We live by them. Just how it is. And, the SEC does a lot of good, like protects you in instances of stock fraud, fraudulent companies, etc. So, don’t go on complaining about them just yet.
Remember good ole’ Elon Musk’s “$420 Funding Secured” tweet? It’s the SEC who comes around and holds people accountable for those things. Anyway, let’s get back on topic with this PDT rule.
Do you have more than $25,000 in your trading account? Then don't worry about it. Trade away! But just know, that if you ever fall under $25,000 level you will be subject to the PDT penalty. I will explain what that penalty is more below.
What is a day trade? A day trade, sometimes referred to as a "round trip" is defined by the buying and selling of a stock on the same day. Or if you are shorting a stock, then shorting, and then covering the stock on the same day.
A swing trade, on the other hand, is when you buy a stock, hold it overnight, and then sell the stock the following day. There are no rules to how many swing trades you can make. The PDT rule only applies to day trades.
What happens if I break the PDT rule? If you do make 4 or more day trades within a 5-day rolling period, all is well. You don't have to pay some crazy fine, and your broker won't liquidate all your funds immediately or anything like that.
You will, however, be restricted from buying and selling a stock on the same day. So, you can still swing trade, and manage your money and enter new positions. Just know that if you buy something, you will be forced to hold it until the following day.
This penalty lasts for 90 days. After 90 days, or as soon as you raise your account balance to $25,000 or above, you will then not be under any restrictions.
What's the history of the PDT rule? Where did it even come from and why does it exist?
The PDT rule was put in to force back in 2001, and many attempts from retail traders of getting rid of it, no matter how many signatures they receive, also come up short.
The whole rationale behind the PDT rule is that it protects traders from assuming too high of levels of risk. The SEC feels that new traders with under $25,000 in their account should focus more on safer longer holding trading strategies.
Make whatever arguments that you want, but truth is, the PDT rule is going nowhere anytime soon.
Most new traders hate the PDT rule. They feel that it restricts them from really day trading and growing their accounts. While this is true for some, most new traders will actually benefit from the PDT restrictions because it will help you trade less and be more careful about the trades you take. The biggest problem I see with new traders is, OVERTRADING! It's like the black plague and is so many newer traders’ demise!
So how do we get around the PDT rule? The short answer? Swing trading! Check out some of my basic swing trading strategies in our blog post.
There are some alternative brokers that you can use like SureTrader, but I would strongly encourage you to stay away from them and any other broker that claims to let you avoid the PDT rule. Don’t believe me? Check out some of these reviews.
Lastly, I want to make it clear that the PDT rule only applies to margin accounts and not cash accounts. However, cash account limitations are basically just as significant as the PDT rule depending on your trading style, because you have to wait for funds to settle (currently 2 days after a trade) before you can use those funds again.
The best way to get around the PDT rule is to slowly save capital, and swing trade to build your account! We offer multiple swing trade alerts a week within our trading room. You can start a one-week free trial with us and try it out!