The financial institution that regulates the stock market established the best day trading rules for accounts under 25k. These are rules that every stock day trader needs to adhere to. In this trading tutorial we’re going to give you the solution to avoid the PDT rule, and more importantly, explain the rules of day trading.
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One of the most annoying things in all the stock market is not being able to trade as much as you want because you have a small account. This is what holds people back from being able to get involved in the stock market and be active. There are some ways around this common issue and we’re going to teach you how to avoid the pattern day trading rules.
See the strategies to use and how to pick stocks for day trading: Best Day Trading Stocks with Mountain of Cash.
Moving forward, we’re going to start outlining the rules for day trading.
What are the Rules for Day Trading?
According to the FINRA, the Financial Industry Regulatory Authority in the US, a pattern day trader must keep a minimum account balance of $25,000 if you day trade four or more times in five business days.
A day trade is being defined as when you buy and sell a security within the same day. The stock market opens at 9:30 AM EST and closes at 4:00 PM EST. If you buy and sell the same stock within that period, it’s considered a day trade.
Now, this may be a stupid rule, but it’s government regulation.
Also known as the Pattern Day Trading (PDT) rule, it only applies to margin accounts. A margin account will give you more leverage to purchase stocks. You can think of it as a loan from your stockbroker.
If a pattern day trader breaks the PDT rule, then you’re going to get a nasty little message from your stockbroker that warns you and flags you as a pattern day trader. If you don’t have already a minimum balance of $25k, you‘ll get a margin call and have a five business days term to bring your account balance to $25,000 by depositing more funds.
If the five business day term expires, and you fail to deposit more funds, your account will be further restricted to trading only as a cash account for 90 days, or until the call is met.
The primary purpose of these day trading rules under 25k is to ensure that you have sufficient funds in your account to support the risk associated with day trading activities.
If you’re not careful enough the same day trading rules can lead you into bad habits. Many people will hold a trade until the next day just to avoid the day trading rules. But, a day trade is meant to be closed during the same day.
If you can’t close the trade, that’s like the worst-case scenario ever. Putting yourself in a position where you might not be able to sell is a bad idea. The most fundamental thing you can do is to plan your trades beforehand.
Below we’re going to share some tips and tricks to avoid the same day trading rules.
Day Trading Rules Under 25k - 5 Tips
We’re going to go over some simple steps that you can take to get around the day trading rules and basically be able to trade as much as you want. A lot of people are not so lucky and they don’t have $25,000 in their account so they do have to deal with the day trading rules under 25k.
The first thing that you need to do in this process is that you need a cash account instead of a margin account. There are no day trading rules for cash accounts.
Find the best online stock brokers for beginners in 2019: Best Day Trading Platforms for Beginners.
The only downside that comes with a cash account is that you have to wait three days for your money to settle after you’ve closed a trade. In other words, you make a trade; you have to wait three days before you can use that money again.
This is also referred to as the T+3 rule.
The simplest way to escape the T+3 rules is to trade options.
1. Learn to Trade Options
Another thing you can do is to learn options trading. If you still want to have the same benefits that come with a stock margin trading account you can learn the day trading options rules. With options, you only have to wait one day before the money settles after a trade.
The day trading options rules are T+1.
We promise options trading is not that difficult, especially if you’re just looking to trade them.
We have developed a simple and yet profitable options trading tutorial that will teach you how to trade stock options for beginners.
There are very complex options strategies out there that get into more difficult ways to construct your approach. The most popular options trading strategies can be found throughout our blog. You’re welcome to check them out.
2. Plan your trades
If you’re going through your planning and you have zero-day trades left for the past 5 trading days, you’ll restrain from taking more trades until the next 5 trading day cycle comes. You should always ask yourself, "How many day trades do I have left?"
If you put yourself in a situation where you can’t sell the stock to avoid the PDT rules you clearly failed to plan the trade.
Sometimes it’s best to not trade at all.
3. Trade Less than the Maximum Requirement
This may sound obvious, but to a certain degree, it does you a favor by only focusing on taking 4-day trades each week. This will instill in you the necessary level of discipline and you get the change to develop a good habit.
Simply adjust your strategy to capture 4 good trades each week and you can still see your account grow slowly but consistently.
However, these restrictions can be a problem if you’re an experimental trader and don’t want to miss losing a real day trading opportunity.
4. Use a non-US Stock Broker
Assuming you’re allowed to open an offshore stock trading account, you can opt to choose a non-US broker. You can trade CFDs with a European stockbroker and you don’t need to have $25,000 to open an account with them.
CFDs are also a cheaper alternative to trading stocks. You have tight spreads and better trading conditions to implement any type of day trading strategy that you may have.
Through CFDs, you can trade most of the shares that you want to trade. Since you’re a day trader you’re not interested to hold stock for the long term or to chase the dividends, which is why CFDs are a great vehicle used for speculation.
5. Change your Time Frame
Instead of day trading, you can seek other trading styles that use bigger time frame like wing trading. Changing your time frame and holding stocks for multiple days can mean higher chances to make bigger profits.
You will have the ability to cut the trade if it doesn’t work for you without being restricted by the day trading rules under 25k.
Conclusion – Same Day Trading Rules
Trading can be exciting and you might have a rush to trade all the times, but the day trading rules under 25k will help you curb that excitement. If you’re looking to be an active trader of stocks directly on the exchange in the US you need to hold in your account more than $25,000 to avoid a margin call. Remember that the PDT rules only apply to the US brokers and US exchanges. If you trade stock on the London exchange the rules for day trading don’t apply.
Make sure you get familiarized and understand what are the rules for day trading. If you’re planning to become a stock day trader. If you have a bigger account, the same day trading rules don’t pertain to you. There are no day trading rules over 25k, so you’ll have more flexibility with your day trading activities. You may also enjoy our ETF trading guide seen here: https://tradingstrategyguides.com/etf-trading-strategies/.
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