Day Trading Rules Under 25k: Don’t Be a Pattern Day Trader!

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Day trading rules under 25k.The financial institution that regulates the stock market established the Pattern Day Trader Rules. 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 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 were to day trade four or more times in five business days.

Day Trading Rules Under 25K
Ptd rule 1

A day trade is 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.

Make sure to check out our guide on Forex trading for beginners as well!

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.

Same Day Trading Rules
Ptd rule 2

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.

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 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 you need to do in this process is to switch to a cash account instead of a margin account. There are no day trading rules for cash accounts.

What Are The Rules For Day Trading
Ptd rule 3

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.

If you’re trading with a small account and fall under the pattern day trading rule, we have some ways to get around it.

See below:

How to avoid day trading rules

1. Learn to Trade Options

Day Trading Rules Under 25K
Ptd rule 4

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 yet profitable options trading tutorial that will teach you how to trade stock options for beginners.

There are very complex options and 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

Same Day Trading Rules
Ptd rule 5

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 failed to plan the trade.

Sometimes it’s best to not trade at all.

3. Trade Less than the Maximum Requirement

What Are The Rules For Day Trading
Ptd rule 6

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 chance to develop 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

Pattern Day Trading Rules
Ptd rule 7

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 in holding stock for the long term or chasing 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 a 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.

Moving on…

Let’s examine a few of the reasons why the PDT rule was put into place.

See below:

Why do Pattern Day Trading Rules Exist

Day Trading Rules Under 25K: Don'T Be A Pattern Day Trader!
Day trading rules under 25k

The main objective of the pattern day trading rule is to protect what the U.S. Securities and Exchange Commission (SEC) perceives to be unsophisticated investors.

In other words, this rule makes sure retail traders with low trading experience won’t be able to drain their stock trading accounts quickly.

Now…

$25,000 is an arbitrary number regarded by the big daddy aka the government as representing enough capital risk to neutralize any losses that might come from reckless day trading activities.

It’s up to you to consider if this is a good idea or a bad idea.

Now, the SEC views day trading as carrying more risk as compared to long-term investing.

And, they might be right on that one to a certain extent.

Let’s not forget that the PDT rule came into effect in 2001 in the aftermath of the dot com bubble. During that time, retail investors flooded the market, lured by the profits made in the dot com era. But, we all know how it ended up for them.

Probably if the small investors had some protection like the PDT rule, some of them would have not lost their accounts.

But, who knows….

Anyway, let’s explore another alternative:

A stock investor with more funds on their hands can avoid the PDT rule by using a cash account.

See below:

Day trading rules with cash account

As the name suggests, a cash account needs you to pay for all stock purchases in full. So, as you might guess you’re not allowed to borrow on margin on a cash account.

One of the biggest advantages of a cash account is that it lowers your trading risk.

The same as with the rules imposed on the margin account, the cash account rules are meant to protect retail investors.

Now, here is a summary of the types of rules you need to follow with a cash account:

  1. You can’t use leverage – you can’t use borrowed money to buy stocks
  2. 3-day clearing rule – if you sell a stock purchase, you have to wait 2 days for the stock to settle and the funds will be available to trade again on the third day
  3. You’re not allowed to short-sell securities
  4. You’re limited to how many times you can buy and sell a particular stock in a single day

On top of that, day traders who violate the SEC rules are slapped with a 90-day trading restriction. This means your account will be frozen for 90 days.

Additionally, another drawback is the fact that US traders can’t file taxes under a trader status. This means you can’t deduct any of your capital loss against your income.

FAQ – Day Trading Rules Under 25k 

What are day-trading rules on Robinhood?

The PDT rule is enforced by Robinhood if you open 4 or more trades within the last 5 trading days, assuming that the number of day trades amounts to more than 6% of your total trades. In other words, you’re limited to only placing 3-day trades within 5 trading days. If you have a minimum of $25,000 in your portfolio, you’re exempt from the PDT rules.

Are there day-trading rules for crypto?

No. The day trading rules don’t apply to cryptocurrency. The cryptocurrency market doesn’t fall under the SEC’s regulation, which means you don’t need to worry about the day trading limits. Usually, cryptocurrency trading doesn’t have the same restrictive rules that the stock market has.

Are there day-trading rules for forex?

There are no pattern day trading rules for forex traders. The PDT rules only apply to stock traders and FINRA-regulated brokers. Forex brokers allow traders to day-trade currencies with any amount.

Are options subject to day trading rules?

The answer is Yes! According to the Financial Industry Regulatory Authority (FINRA), the PDT rule applies to day trading options. However, since FINRA only operates in the US it only applies to US options.

Do day trading rules apply to cash accounts?

No, pattern-day trading rules don’t apply to cash accounts. The PDT rule is only designed for margin accounts. Under a cash account, traders don’t borrow on margin, so day traders that buy and sell stock using a cash account are subject to other rules.

Can you day trade without margin?

Yes! You can day-trade without a margin account, but you need to have at least $25,000 in your brokerage account. Additionally, your stock trading account must have a pattern day trade status.

What do you need to know about day trading rules and taxes?

According to the US tax code, day traders have to pay a short-term capital gain tax of 28% on all profits. Meanwhile, investors who held a stock for more than a year will have to pay the long-term capital gain tax, which is in the 15% – 20% range.

Day Trading Rules Under 25K Video

Conclusion – Day Trading Rules Under 25K

Trading can be exciting, and you might have the rush to trade all the time, 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 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 with 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: ETF Trading Strategies.

Thank you for reading!

Feel free to leave any comments below, we do read them all and will respond.


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Disclaimer: Trading foreign exchange on margin carries a high level of risk, and may not be suitable for all investors. The high degree of leverage can work against you as well as for you. Before deciding to invest in foreign exchange you should carefully consider your investment objectives, level of experience, and risk appetite. No information or opinion contained on this site should be taken as a solicitation or offer to buy or sell any currency, equity or other financial instruments or services. Past performance is no indication or guarantee of future performance.