5 Ways to Avoid the PDT Rule

Introduction

There is no doubt, day trading can be a very exciting way of making a living. The focus, the fast-paced decision-making, the constant duel between buyers and sellers, and, of course, the potential profits are what make so many traders want to be day traders. However, as for all good things in life, there is a “but”; and for day traders, this “but” is represented by the PDT Rule.

In today’s article, we’ll learn what the PDT rule is and how you can avoid the PDT rule without sacrificing your trading ambitions.

What is the PDT Rule?

The Pattern Day Trader Rule (or PDT rule) is designed to protect inexperienced traders from excessive risk, but it has quickly become a thorn in the side of anyone looking to day trade. 

Established by the FINRA (Financial Industry Regulatory Authority), the PDT rule dictates any trader who executes four or more day trades within five business days is to be considered a pattern day trader and that all pattern day traders are required to maintain a minimum balance of $25,000 in your trading account at all times.

If the trader’s account doesn’t meet this minimum balance requirement, he or she will be limited to only liquidating trades, and that could cripple anyone’s trading strategy.

So, are there any ways traders with an account under $25k avoid the PDT rule, and if so, what are they?

Well, the article’s title gave that away.

Yes. There are ways. There are five ways, to be precise. Here they are:

Option 1: Increase Your Capital to at least $25,000

While it may not be the most realistic and practical solution for all traders, one way to bypass the PDT rule, of course,  is to simply fund your trading account to meet the $25,000 requirement.

This is a straightforward step, but it requires a greater capital that not every trader would be able to invest or willing to risk. If, however, you have the financial means, know that this option allows you to day trade without any restrictions.

Option 2: Open a Cash Account

Another way to avoid the PDT rule is by opening a cash account instead of a margin account.

With a cash account, there is no limit to the number of day trades as long as you have enough settled cash to pay for your purchases.

This means that while you won’t be able to day trade the same cash across multiple trades during the same day, you can still buy and sell positions as long as you wait for the previous trades to settle (which takes two business days).

Remember that trading from a cash account will allow you to avoid the PDT rule but will also greatly affect your ability to use leverage.

Option 3: Switch from day trading to swing trading

We understand that day trading and swing trading can be very different activities, and we also understand that passing from one to the other often involves having to create an entirely new strategy and trading rulebook but, to give a full view of all possible options, we had to include this one too.

As a swing trader, you would execute fewer trades and less frequently which would protect you from falling victim to the PDT rule.

Changing the type and style of trading can be challenging at first but, once used to it, you’ll realize that swing trading can be as rewarding and exciting as day trading.

Option 4: Trade Forex or Futures

If you want to avoid the PDT rule but also want to remain a day trader, you could consider trading the Forex (foreign exchange) market, or futures markets.

The Forex and the Futures markets are not as strictly regulated as the Stock market and the PDT rule does not apply.

The Forex market is open 24/5, allowing for lots of opportunities to day trade and futures trading can offer substantial leverage and, most importantly, trading either means you won’t have to worry about the PDT rule at all.

However, do keep in mind that switching from stocks to currencies and futures will also require new research, learning, and trading strategies.

Option 5: Utilize a Proprietary Trading Firm

If you love day trading and stock is all you care about, this is the perfect way for you to remain a stock day trader and avoid the PDT rule at the same time: Join Trade The Pool, the stock prop trading firm!

Trade The Pool allows you to day trade stocks using their capital rather than your own, which means you won’t have to part with $25k of your hard-earned money or switch to swing and futures trading unless you really want to.

If you are wondering how this is possible, remember that the PDT rule was introduced to protect small traders’ capital, but since you’d be trading TTP’s capital rather than yours, the PDT rule doesn’t apply.

Furthermore, while free from all PDT impositions, by signing up with Trade The Pool, you also gain access to various trading and research tools as well as a supportive environment.

If you are worried about not being capable or experienced enough yet, stop worrying; by taking a look at the website, you’ll find that TTP provides lots of educational content including this blog, ebooks, interviews, live trading videos, and much more. It doesn’t cost anything and can be greatly beneficial for traders looking to sharpen their skills.

Conclusion

All of these four options will allow you to avoid the infamous PDT rule and, although it could mean having to change the way you trade, who knows, you might end up being more successful in your new discipline than you were at day trading.

However, if you read this article because you feel you are at risk of breaking the PDT rule, you are probably a stock day trader. And if you are a stock day trader it is because that’s what you love doing and have trained to do.

Well, at Trade The Pool, the team believes that talented traders should be allowed the freedom to do what they’re good at; and if that happens to be day trading stocks, then so be it. They’re behind you all the way.

This is why, if you love stock day trading and want to avoid the PDT rule while remaining true to yourself, option 5 is the one that makes sense.

I hope this helps.

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