Pattern Day Trader (PDT)

What is Pattern Day Trading (PDT)?

Pattern Day Trading (PDT) is a term used by the U.S. Securities and Exchange Commission (SEC) to describe a trading strategy where an individual executes four or more day trades within a five-day period in a margin account.

A day trade is defined as the purchase and sale or the sale and purchase of the same security on the same day. In other words, if you buy a stock in the morning and sell it later that day, that's considered a day trade.

Why is Pattern Day Trading Regulated?

The regulation is put in place to protect investors from excessive risk taking. The SEC believes that individuals who engage in frequent day trading are more likely to take on excessive risk and incur significant financial losses.

How to Avoid PDT

There are a few ways to avoid the Pattern Day Trading restrictions. Here are a few:

1. Open a Cash Account: If you open a cash account, you won't be subject to the PDT restrictions. In a cash account, you must pay for the full value of any stock you purchase before you can sell it.

2. Increase Your Account Balance: If you increase your account balance to $25,000 or more, you will no longer be subject to the PDT restrictions.

3. Wait 5 Days: If you make a day trade, you can wait 5 days before making another day trade. This will reset the PDT counter.

4. Off-Shore Broker: Brokers such as CMEG accept US clients and as they are not regulated by the US there is no PDT, however, there are still risks with this, for example, its regulated off-shore, therefor if the broker goes bankrupt you may lose your capital. Another risk is that your strategy may not be profitable using an off-shore broker as fees are usually much higher, and considering you won't have $25,000 it will most likely take up a large amount of your profits

Pros of Pattern Day Trading:

1. Protects inexperienced traders: The PDT rule is designed to prevent traders who are new to the market and have limited capital from making impulsive and risky trades that could result in significant losses.

2. Promotes financial stability: By reducing the likelihood of large losses, the PDT rule helps to promote stability in the financial markets and protects the overall system from excessive risk.

Cons of Pattern Day Trading:

1. Limits flexibility: The PDT rule restricts traders from executing more than three day trades within a five-day period, which can limit their flexibility and prevent them from taking advantage of short-term market opportunities.

2. Can be restrictive for experienced traders: The PDT rule applies to all traders, regardless of their experience level, which can be frustrating for traders who have a solid understanding of the markets and risk management strategies.

3. Discourages market participation: By making it harder for traders to participate in the market, the PDT rule may discourage some traders from entering the market and limit liquidity.

In conclusion, the PDT rule has both positive and negative aspects. While it is designed to protect inexperienced traders, it can also limit the flexibility and market participation of more experienced traders. To avoid the PDT rule, traders can opt to trade in a cash account or build their equity in a margin account to over $25,000.