How to Avoid the PDT Rule: 4 Tricks to Use

Are you trading with a small account and under the PDT rule? Then you’re probably wondering how to avoid the pattern day trader rule.

If you are in the US and using a US based broker, you might be subjected to the Pattern Day Trader (PDT) rule. This rule kicks in if you’re trading with a small account under $25K. It could potentially limit your trading since you can only day trade 3 times a week.

In this article, we’ll be talking about 4 ways to get around the PDT rule. We’ll also sharesome useful tips I have for you if you are a beginner day trader with a small account. If you want to make that Lamborghini money, I don’t quite do that. But we do get that stable Corolla and Civic money here.

The process isn’t inherently tricky or hard to wrap your head around. It just involves some considerations to ensure your trading activities are all above board. So, let’s learn how to avoid the PDT rule together…

PDT Rules Overview

I remember a stupid rule my mother gave me when I was 6. The rule wasI had to ask permission every time I wanted to eat my Halloween candies from trick or treating. Even worse, I could only do so three times a week, even though the hard earned chocolates were rightfully mine. How is that even fair?

Just kidding, though. I’ve never had to deal with the PDT rule, and I never had a mother who let me eat candies either.

The PDT rule stands for Pattern Day Trader rule. It was established in 2001 by the Financial Industry Regulatory Authority (FINRA) and the United States SEC. It is designed to identify and prevent certain kinds of trades that are flagged as a pattern under FINRA rules.

Basically, it limits how many times you can trade if your account is under $25,000. Under the pattern day trading rules under $25k, a day trader can only place 3 day trades in a consecutive 5 day period. A greater number of day trades in such a situation is basically prohibited.

Think of it as trade restrictions for a very specific kind of trader, trade, and portfolio.

To be specific, a day trade is when you open and close a position within the same day. For example, if you buy and sell a stock or short and cover a stock position, these are considered round trips. They count as a day trade. And any day trade falls victim to pattern day trading rules.

Therefore, under the PDT rule, trading is inherently limited. If you’re trading with an account less than $25k, the minimum equity requirement sends up a flag. If you decide to trade 2 round trips on a Monday and 1 more on Tuesday, the limit kicks in. You cannot day trade again until the following Monday.

Of course, if you meet the minimum equity of $25,000, the rules change. But how many of us are really walking around with that kind of liquid cash?

To many beginner day traders with a small account, this could be quite a limitation. After all, it’s your hard-earned money. Shouldn’t you be able to do with it as you please?

It's hard to accept that the SEC should be able to limit your access to buying power all in the name of “protecting investors.” But the PDT rule is not necessarily a bad thing all the time. I have some really useful trading tips for beginner traders under PDT later in the article, so hold on tight.

Just keep in mind that these tips all apply for the pattern day trading rules under $25k. But now that we’ve set the table, are you ready to learn how to avoid the pattern day trader rule? Read on!

What are some ways for new traders to get around the PDT rule?

So, now that we know the basics, you’re likely champing at the bit. You surely to learn how to avoid pattern day trading activities and limitations. Right?

The good news is savvy traders have some solid PDT options to consider. Some are easier than others. But each is totally viable (and totally legal). Here are just a few PDT rule options to consider:

1. Use a cash account.

The PDT rule and a cash account are essentially blind to each other. This is a little-known fact that many beginner traders don’t realize. The PDT rule only applies to margin trading accounts.

Margin trading allows you to use leverage, essentially borrowing money from the broker to trade. Let's say I have a $5K margin account with Interactive Brokers. Since the broker allows me 4 times leverage, my buying power to day trade is $20K.

If I'm looking to buy a stock which we’ll say is selling for $11, my maximum size is a bit over 1,800 shares. Well, there’s also margin requirement and maintenance. But using the $5K in a margin account would subject me to PDT restrictions.

Alternatively, you can open a cash account with Interactive Brokers. Since the account is cash, you will not have access to leverage, the $20K buying power we mentioned earlier. Therefore, your true buying power is the same $5K. That means the most stock shares I can buy or sell is 454 shares, in this case.

The pros of trading with a cash account are that you are not subject to the PDT rule and the 3 day trade limitation per week. However, they do have a con: you need to wait for the cash to settle, and the settlement takes 2 days. That's the standard for most brokers.

If I decide to buy the most shares you could with that $5k account, I’d buy and sell 454 shares on a Monday. I will not have access to that cash again until Wednesday.

I know some people are getting mad right now. You might even be saying, “But humbled trader, that's exactly the same as trading under PDT rule, you liar.” Easy there, friend. It’ll all make sense.

Let’s say you trade smaller sizes. Instead of using the entire $5,000 to buy a single position each time, consider this. What if you divide it up to a $500 gross exposure per trade? If you use $1,000 of your cash to day trade on Monday, you’ll still have $4,000 cash left to use on Tuesday.

You’ll also get the cash settlement back on Wednesday, and so on and so forth. Basically, if you allocate meticulously just $500 or up to a $1,000 position for each trading day, the math works out in your favor. You could be in a better position and have access to more day trades than if you were trading margin under PDT.

Yes, obviously this method would only benefit you if you had a bigger account size. If you’re trading with just $500 or $1000, you really don’t have much to work with. And this is regardless of whether you are trading with a margin account or a cash account.

Either way, though, for traders who wish to avoid the PDT rule, a cash account is everything. It is easily one of the most reliable ways for how to avoid pattern day trading limitations. But it’s not the only way.

2. Divide that capital up into multiple margin accounts

The second way beginner traders can avoid PDT is a variation of the first. Instead of opening one single cash account or one margin account with $5000, think broadly. You can instead divide that capital up into multiple margin accounts.

If you take $5K and split it into two separate margin accounts at different brokers, boom! Your trading power has automatically increased! You nowhave a total of 6 day trades a week. You also still keep a total buying power of $20K, and honestly, that's not bad.

Fridays are usually slower and choppier, so you can basically trade once each day from Monday to Thursday. If one of those days presents you with a very nice set up, the door is essentially open. A low float runner reclaiming VWAP and squeezing all the shorts out, means you have options. There could potentially be set ups for you to use the remaining 2 trades.

Now, obviously the more capital you have, the more margin accounts you can open to access more day trades. If you have a total of $10k, then you can open 3 or 4 accounts depending on the broker minimums. With this dynamic, you get to have a total of 9 or 12 day trades in a week.

3. Open an offshore trading account

This is the real third option. However, I don’t really recommend this. Still, some traders might choose to do this because only US brokers have to follow the FINRA and SEC rules including PDT.

Some offshore brokers that came to my mind are CMEG and Trade Zero. There is no PDT rule with CMEG. With Trade Zero International, there is still no PDT rule, but they do not accept US applicants. American traders have to go with Trade Zero America which still has the PDT restriction.

With offshore brokers comes a lot of risks to the traders and investors since they are not regulated by FINRA rules. A good example was Suretrader, an offshore broker in the Bahamas. Back in 2015 and 2016, it was a really popular broker American traders went to in order to trade around the DPT rule.

However, Suretrader was shut down due to countless issues. This included penny stock pump and dump schemes by insiders, poor record keeping and financial rule regulations. We’re not going to get into the details, but that’s why I do not recommend going this route. Just know that this option is basically no longer on the table for avoiding PDT restrictions.

If you do choose to do so, make sure you read all the reviews and fine prints. But more than anything, just understand the risk while regularly withdrawing funds from your account.

4. Buy and swing trade overnight

Since the PDT rule only applies to day trades, you buy and sell a stock within the same day, there’s a time loophole that works in your benefit. When you buy a stock overnight and sell the next morning, that does not count as a day trade. It’s the same thing if you decide to get into swing trading for a couple of days or weeks. PDT restrictions don’t kick in!

Honestly, though, this brings us to the topic of costly mistakes I see beginner traders make because they’re under the PDT rule. When considering your PDT rule options, don’t forget to consider these common pitfalls:

Here are some important tips for trading under PDT

A slap on the wrist is no fun, but do you know what’s worse? Actual, legal penalties. Follow this guidance to ensure you don’t fall victim to the common errors novice traders make.

1. Keep track of your 3 day trades

Check yourself before entering a day trade. If you break the PDT rule you might receive a warning from your broker the first time. However, the second violation could result in the broker freezing your account for either:

90 days, or

until you can fund it above the needed $25K.

Not good, right? Just remember, PDT trading is heavily scrutinized. So treat lightly!

2. Use your day trades ONLY if you see a quality set up

Do not force trades. I see a lot of new traders under PDT, and they feel like they MUST use up all the 3 day trades for the week. If they don’t, they feel like it's been wasted.

That’s absolutely not true. If there are no A+ setups for you in this market condition, don’t force trades. That's what we call overtrading.

3. Don’t swing a stock position overnight

Many traders fall victim to this trap. Don't enter a swing position just because you:

Used up all 3 of your day trades for the week

Want to swing a position overnight just for the sake of it,

Or even worse, all 3.

You should never turn a losing day trade into a swing trade. Why? It’s not worth the risk.

I see many beginner day traders lose track of their day trade amount on the week. Then, they only realize that you cannot sell their position because they used up all the day trades. They end up having to hold a losing position overnight.

What happens if a stock tanks overnight? Or what happens if the shady penny stock company decides to do an offering after markets close? You should never turn a losing day trade into a swing trade. That's what we call bag holding and trading on hope.

As I've mentioned many times before, PDT trading is a business, not a hobby. It’s definitely not something you can pick up in 1 or 2 weeks. Just because you suddenly have the time to sit in front of the computer doesn’t make you a trading expert, after all.

It takes money to run a business, and it takes money to really grow a trading account. The minimum I would recommend to start trading is at least $4,000 to $5,000. The marketing of growing a small $500 to 1 million in six months is fairly unrealistic. Compound that with working only 1 hour a day from anywhere in the world and we get into pipe dream territory.

Trading under PDT is not necessarily a bad thing. If anything, it forces a new trader to be more selective and patient.

By only entering trades you have planned out as your A+ set up, your trading is more intentional. And potentially more reliable! There should be no chasing breakouts and definitely no following chatroom alerts blindly.

Trade Like a Pro

At the end of the day, PDT avoidance might not be for everyone. Certainly, those who are just dabbling might do well to avoid this type of day trading in favor of something a bit more straightforward. But if you made it to the end of the article and you’re hungry for more insights, guess what? You’re not exactly wet behind the ears!

If you want more trading insights just like our PDT restrictions post above, check out our blog archive. There, you’ll find tons of helpful tips, trading methods and more. And all from the Humbled Trader.

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How to Avoid the PDT Rule: 4 Tricks to Use | Humbled Trader (2024)