How to Avoid Getting Marked As A Pattern Day Trader

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You’re usually committed to following the rules. However, if you recently joined the trading world, violating the pattern day trading rule is easier than you might think, especially when markets are highly volatile. Becoming a routine day trader might negatively affect your ability to engage in the market. Try to avoid getting into this situation as much as possible. This post discusses the pattern day trader rule workaround and sheds light on the dilemma – can you day trade on multiple platforms without breaking the rules? But first, let’s dive into some basics.

What is Day Trading?

Day trading means opening and closing securities within a single day. Opening and closing means buying and selling securities or selling and then buying. Day trading applies to all securities, including options, stocks, EFTs, and bonds.

Day trading has nothing to do with traditional stock investment. It just involves exploiting the up-and-down price movements in the financial markets. Entering and exiting a different position on the same day is not considered a day trade.

What is a Pattern Day Trader?

A person is considered a pattern day trader when they meet the following criteria:

  • Engages in four or more day trades in a rolling five business day period
  • The trades make up more than six percent of their trading account activity within those five days

For instance, a day trader who engages in three-day trades on Tuesday and three-day trades on Wednesday and has no other account activity would qualify as a pattern day trader.

If you’re a very active day trader, chances are that your account will be flagged as a “PDT” or pattern day trader. When your account is flagged as one, the restrictions kick in.

You must maintain at least $25,000 in your margin trading account equity with the pattern day trader label. This amount has to be held at all times, and you’ll be required to replenish your account when the balance falls below $25,000, even if it means you’re missing a dollar. Also, you cannot exceed three-day trades in five consecutive trading days.

The pattern day trading rule addresses the additional risk posed by trading and ensures that traders have enough equity to meet their margin calls.

If you fail to meet the equity requirement, you’ll face restrictions regarding your ability to close out or sell positions you’ve opened. You could also be limited to trading on a cash basis for three months or until you’ve met the margin call.

It’s worth noting that the day trading pattern rule applies only to margin accounts. This is an account that allows traders to trade using borrowed funds. If you trade with a cash account, the rule does not apply because you’re not borrowing funds in the first place.

 How to Avoid the Pattern Day Trader Label

The pattern day trading rule causes some discomfort to many traders. However, there are some actions that you can take to avoid the pattern day trader label, including:

Understand how the calendar works: The simplest way to escape the PDT label is to avoid making more than three-day trades within five consecutive business days. However, remember that the five-day period counts as business days instead of calendar days. If you make three trades on Thursday and another one on Monday, you may be given the PDT status.

Know your broker’s rules: Individual contracts may not be considered day trades if they are part of a large order if you’re trading options. However, it pays to know your brokerage’s rules concerning day trades.

Keep an eye on qualifying trades: If you use an online brokerage, check the user interface for the number of qualifying day trades you’ve made in the past five business days. You want to make sure your total doesn’t exceed four-day trades.

Get some classes: You don’t want to give your broker a reason to believe you are or will be, a pattern day trader. So, enroll in some classes or check your brokerage’s fine print concerning pattern day trading rules.

Bottom Line

Getting labeled as a pattern day trader is no fun. Only some people are forgiving of a new trader with speed and gains on their mind. So, if you want to be a more active trader without getting the PDT status, consider brushing up on the rules concerning margin and avoid overtrading.

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