The Rules Around Day Trading

In this post:

• How many day trades can you make in a day?
• Is day trading illegal?
• What are the day trading restrictions?

Whether you are a professional trader or do it as a hobby, day trading might be part of your trading plan. Traders need to be aware of day trading restrictions placed on them on day traders, particularly the PDT restriction – the Pattern Day Trading rule (PDT). If day trading restrictions are violated, day traders and their accounts can be negatively affected. 

Day traders may see these rules as annoying, but they are put into place to help protect your investment in case things go South. However, we don’t want things going South, so we have compiled everything you need to know about day trading rules to help ensure that you have all the information you need. Let’s go over the PDT rule and how you can get around it, so you can focus on your trades.

What’s a Day Trader?

Before we go into the rules about day trading, you should understand what classifies a day trade. Day trading is about capitalizing on the day-to-day moves in the overall market or on an individual stock. An example of a day trade is if you purchase a stock, or option at the start of the business day, and then sell it before the market closes on the same day, that would be considered a day trade. 

If you wait overnight to sell the stock, it’s no longer considered a day trade. Some traders like to invest their money or buy a stock and hold it long-term. A shorter time frame of trading with a longer-term perspective is swing trading, where traders have stocks for a few days, weeks, or months.

The Benefits of Day Trading

One of my favorite trading styles is day trading because it allows traders to capture the small but meaningful moves that happen every day and every minute across the entire stock market. Knowing this skill can help you survive not only sideways chop or volatility, but can also complement every other strategy. I like to trade options to take advantage of leverage and achieve high percent returns without spending a lot of time in a stock or allocating as much capital.

What Are the Pattern Day Trader Restrictions?

Day trading is not illegal, but there are a lot of restrictions put into place to protect you and the market from a large number of these transactions. Trading stocks already requires complex strategies to succeed, but day trading can be even more challenging to understand when restrictions are in place. This is why it’s recommended for trained professionals rather than beginner traders.

However, if you want to become a day trader, we are here to help you understand the rules and regulations set in place to help you on your way. Before beginning your day trading journey, be sure you read and understand them thoroughly. Several restrictions have been placed on day trading to protect you as a trader.

Here are a few key points to the day trading rule:

• If your account contains less than $25k, you cannot make more than three-day trades in five day period.
• Day trading proceeds can take up to three days to settle, meaning you don’t have that money available to trade with until it settles.
• You can incur penalties for making too many day trades.
• Your broker will lock your account for violating the day trading rule.

What Are the Rules for Day Trading with or under $25k?

If your brokerage account contains less than $25k, you will find that you are more restricted on the number of day trades that you are capable of doing. For instance, you are limited to conducting only three-day trades in a five-day rolling period.

PDT Restriction Example

If you conduct three-day trades on Monday, you will be flagged if you make another day trade before Saturday. What does being flagged mean? If you execute the fourth trade, your account will be restricted from conducting any transactions for at least 90 days.

People have a misconception about day trading that the trade settlement is immediate. Even though you make a day trade, the money is not instantly deposited into your account. There is a three-day wait for this transaction to go through. With some firms, you can use the money before it settles, but at other firms, the funds aren’t available until settlement. 

If you choose to day trade, you need to remember that you must follow the rules to avoid your account being limited or even restricted. You are limited to three-day trades in five days unless your account has over $25k in it. But there is a way around the day trading rule.

How to Get Around the PDT Rule?

There is a straightforward solution to avoid the PDT rule for day traders that aren’t trading on $25k plus accounts. We don’t want the PDT rule to restrict us, and many new traders experience difficulty getting around the PDT rule. 

An easy way to avoid the PDT rule is to open a cash account. When signing up with your broker, you have the option to create two different types of accounts:

• A margin account – a margin account is a typical account you open, where your account has to meet specific standards, like the $25k rule. For most day traders, though, you want to open a cash account.

• A cash account – With a cash account, you invest a certain amount of money, which becomes your buying power to use every day. We can use this money to day trade, and the funds will reset the following day. Most brokers settle new funds overnight, so you will see your new balance of buying power the next day.

Your only restriction with day trading cash accounts is how much capital you have, rather than the restrictions of a margin account where you have to keep your account over $25k. With a cash account, we can trade the entire day with as much money as you have in your account, whether that be $100, $1,000, $10,000, etc. Now, we can take multiple smaller trades or even take a few larger trades in one day without the restrictions of the PDT rule.

Day Trading With a Cash Account Example

For example, we have $5,000 in a cash account. Meaning we have $5,000 worth of buying power for trading that day. If we buy an option for $2,000, we now have $3,000 worth of buying power left for the day.

When managing risk with cash accounts, be mindful of how much you are investing. Whatever your account size is, determine a number you feel comfortable trading with, $500 per trade, for example. This way, you understand the size of the trades you take.

I hope you realize the power behind day trading and the abundant opportunities the market brings every day. There are small but powerful moves that happen in price action constantly.

Don’t let the PDT rule stop you from exploring day trading. Using a cash account is a simple yet effective way to continue making daily trades without having an account over $25k. If you still have questions and concerns about day trading then consider joining the Simpler Day Trading room, where you can trade alongside the simpler community led by an expert trader. Sign up today and gain access to Simpler Trading resources such as the live chat room, premium weekly videos, and the learning center. Why trade alone when you can trade with us.

Always remember, keep getting better every day, and happy trading.

FAQs on Pattern Day Trader Rules