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How to Get Around the PDT Rule Day Trading Small Account (Pattern Day Trader Rule Explained) - YouTube
Channel: Humbled Trader
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are you trading with a small account and
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under PDT well here are some ways to get
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around it and my tips on how to trade
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with a small account under $25,000 this
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rule could be kind of limiting since
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that means you can only day trade three
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times a week so in this video we'll be
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talking about the four ways to get
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around the PDT rule and some useful
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trading tips I have for you if you are
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beginner trader with a small account so
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if you're new to trading and want to
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start making a Lamborghini money
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remember to drop a like at the bottom of
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the video just kidding only Corolla and
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civic money here first of all let's go
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over exactly what this PDT rule is it's
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a stupid rule my mother told me when I
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was little I have to ask your
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permissions every time I want to eat my
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Halloween candies from trick-or-treating
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and I can only do so three times a week
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even though those hard-earned candies
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and chocolates are so rightfully mine
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how is that even fair okay somehow that
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analogy has to do with the PDT rule you
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just kind of have to figure it out just
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kidding I never had to deal with the PDT
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rule and I never had a mother who lets
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me eat candies either PDT rule stands
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for pattern day trader rule it was
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established in 2001 by FINRA and the
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United States SEC basically it limits
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how many times you can day trade a week
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if your account is under $25,000 under
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the PDT rule the day trader can only
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place three day trades in a consecutive
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five-day period a day trade is when you
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open and close a position within the
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same day so for example if you buy and
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sell a stock or short and cover a stock
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position these are considered
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round-trips
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and they each count as a day trade
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basically if you're trading within
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accounts less than $25,000 and hence
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under PDT rule and you decide to place
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two round-trips on a Monday and then one
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more on the Tuesday then that means
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you cannot they train again until the
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following Monday too many beginner day
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traders with a small account this could
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be quite a limitation after all it's
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your hard-earned money it's difficult to
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accept that the SEC should be able to
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limit your access to buying power all in
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the name of protecting the investors but
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the PDT rule is not necessarily a bad
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thing all the time I have some really
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useful trading tips for beginner traders
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with a small account later on in the
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video so hold on tight so how do you get
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around the PDT rule well here are some
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options for you the first option is to
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use a cash account this is a
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little-known fact that many beginner
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traders don't realize PDT rule only
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applies to margin trading accounts
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margin trading allows you to use
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leverage essentially borrowing money
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from the broker to trade so that say if
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I have a $5,000 margin accounts with
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Interactive Brokers since the broker
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allows me four times leverage my buying
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power to day trade is actually twenty
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thousand dollars so if I'm looking to
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buy a stock like CCL Carnival Cruise
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Lines that's currently trading around
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eleven dollars my maximum sheer size I
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can take is a little bit over 1,800
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shares but since I'm using that $5,000
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in a margin trading account that would
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subject me to PDT rule alternatively you
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can open a cash accounts with any of
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your brokers since the account is in
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cash you will not have access to
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leverage the twenty thousand dollars of
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buying power that we mentioned earlier
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so you are true buying power is the same
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5,000 dollars you have in cash that
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means in this case the most CCL shares I
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can buy is around four hundred fifty
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four shares the benefit of trading with
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a cash account is of course you're not
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subjected to the PDT rule and the three
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day treat the limitation per week but
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the downside is you need to wait for the
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cash to settle after you sell the
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position the settlement
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is two days that's the standard across
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most of the brokers so for example if I
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decide to buy the most CCL shares I
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could with the same $5,000 cash account
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i buy and sell 554 shares a Monday I
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will not have access to that cash again
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until Wednesday I know some of you are
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getting frustrated right now but a
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humble trader that's exactly the same as
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trading under a PvP rule you're a liar
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but that's a if you trade smaller size
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instead of using the entire $5,000 cash
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to buy a single position what if you
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divided it up to use $500 or $1,000
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gross exposure per trade so if you use
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$1,000 of that cash today trade
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CCL on Monday you still have access to
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the remaining four thousand dollars to
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trade on Tuesday and then you get the
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cash settlement back on Wednesday and so
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on and so forth basically if you could
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allocate meticulously just $500 or up to
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$1,000 position for each trading day you
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could be in a better position and have
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access to more day trades than if you
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are trading under PDT with a margin
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account and yes obviously this method
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will only benefit you if you had a
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bigger account size of a couple of
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thousand dollars if you're trading with
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just 500 to a thousand dollars you
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really don't have much cash to work with
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whether you're trading in your cash
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account or a margin account under PDT
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another downside that's worth noting is
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that you cannot short sell a stock with
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a cash account but for most beginner
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traders starting out it's better to
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learn how to buy what long a stock
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anyways the second way you can do to
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avoid PDT
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it's a variation of the first one
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instead of opening one single cash
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account or one margin account with
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$5,000 you could divide that capital up
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into multiple margin accounts so if you
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take that $5,000 and you split it into
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two separate margin account
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different brokers then you have a total
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of six day trades a week and if both of
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the brokers still give you four times
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leverage then you still have a total
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buying power of $20,000 and honestly
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that's not bad
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now obviously the more capital you have
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the more margin accounts you can open
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and access even more day trades if you
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have a total of let's say $10,000 then
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you can open three or four margin
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accounts depending on the broker
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minimums and then you can have access to
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a total of nine or twelve day trades a
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week now the third option for day
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traders with a small account to avoid
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PDT
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is to marry a Canadian move to Canada
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apply for permanent residency hit that
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like button to get approved and then
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open a brokerage account here in Canada
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and voila you don't have to trade under
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PDT now if only I know a day trader in
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Canada okay
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oh jokes aside the third option to avoid
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PDT is actually one that I wouldn't
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strongly recommend but some traders
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might choose to do this it's to open an
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offshore trading account only the
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us-based
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brokers have to follow the FINRA and the
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SEC rules which includes the PDT rule
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some offshore brokers I know many
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traders use our ce mec and trade zero
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there's no PDT rule a/c Meg and it's the
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same thing a trade zero international
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but the thing is trade zero
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international they do not accept US
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applicants American traders have to go
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with trade zero America which still has
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the PDT restriction using an offshore
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broker could mean a lot more risks for
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the traders and investors since the
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brokerages are not regulated by FINRA a
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really good example of this was sure
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trader it was an offshore broker in a
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Bahamas back in two thousand fifteen and
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sixteen sure trader was very popular
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among the American traders in order to
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avoid trading with
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et restriction but unfortunately in 2019
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sure trader was shut down due to a lot
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of controversial issues involving penny
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stock pump and dump scheme involving the
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insiders poor record-keeping and
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violating some of the financial rules
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and regulations we're not gonna go into
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the details here since that broker no
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longer exists but this is why I do not
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recommend going with this route unless
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you absolutely have to if you choose to
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trade with an offshore broker make sure
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you read all the reviews fine print and
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just understand the potential risks and
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regularly withdraw your funds from your
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account
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the fourth way to get around the PDT
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rule is to buy and swing over a position
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overnight since PDT rule only applies to
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day trades meaning when you buy and sell
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a stock within the same day when you buy
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and hold a stock overnight and sell it
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the next day into pre market spike or
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the morning push that does not count as
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a day trade and it's the same thing if
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you decide to get into swing trading for
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a couple of days or a couple of weeks I
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have a video on my buy overnight
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strategy if you want to check that out
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that brings us to the topic of a lot of
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costly mistakes I see beginner traders
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make because they're trading under PDT
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rule here are some important tips for
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trading with a small account that might
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help you out first of all make sure
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you're keeping track of your three-day
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trades and check yourself before
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entering each trade if you break the PDT
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rule you might receive just a warning
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the first time from your broker but the
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second violation could result in the
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broker freezing your entire account for
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90 days or until you can fund the
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account above $25,000 second tip only
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use your day trade if you see a quality
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set up do not force trades I see a lot
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of new traders on the PDT rule and they
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feel like they must use up all the three
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day trades for the week
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otherwise it's waste
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and no that's absolutely not true if
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there's no a-plus setups for you in this
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market condition do not force trades
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that's what we call over trading same
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thing with swinging a stock overnight
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don't enter a swing position just
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because you used up all your three-day
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treats for the week and you are gonna
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hold the position overnight just for the
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sake of it or even worse tip number
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three you should never turn a losing day
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trade into a swing trade I see many
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beginner day traders lose track of their
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day trades on the week and they realize
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they cannot sell a day trade position
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because of the risk of violating PDT
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rule so they end up having to hold a
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losing position overnight what happens
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if the shady penny stock company decides
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to do an offering after markets closed
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or pre markets the next day you should
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never ever turn a losing day trade into
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a swing trade that's what we call bag
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holding or trading on hope like I
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mentioned many times before on this
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channel day trading is a business it's
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not a hobby and definitely not something
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you can just pick up in one or two weeks
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because you suddenly have the time to
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sit in front of the computer all day
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during quarantine so we all know it
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takes money and capital to start a
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business it's the same way with trading
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it takes money to grow a small trading
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account the minimum I would recommend to
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start day trading it's at least 4,000 or
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5,000 dollars trading under PDT rule
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it's not necessarily a bad thing if
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anything it forces a new trader to be
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even more selective and patient only
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entering traits that may have planned
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out for as they're a plus setup no
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chasing breakouts and definitely not
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following chatroom alerts so let me know
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in the comments below are you trading
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under PDT rule and are you using any of
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the four methods I mention
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in the video thank you guys so much for
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watching as always and the homo trader
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and I'll see you guys next week hey guys
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thanks for watching I hope you enjoy the
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video and the bad jokes if you want to
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see more day trading content make sure
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to subscribe and follow me on Twitter
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and Instagram for more if you'd like to
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trade with me daily and get my free
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weekend watchlist and trading journal
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make sure to check out the links below
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for more resources stay green stay
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positive and I'll see you guys next time
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