So you want to jump into the stock market and be a day trader.
Problem is a little something called the pattern day trader rule that can restrict the number of trades you can make within a certain time frame. There is an exemption … but you need an account balance of at least $25,000.
This is a rule new traders seem to struggle with the most, and I get a ton of messages about it. (Quick side note … this rule maybe isn’t so bad. More on that shortly.)
Here’s the thing: There are ways to avoid the pattern day trader rule that can allow you to start trading with far less than $25,000 in your brokerage account. I didn’t have anywhere near that amount when I was first getting started. Many of my students in my Trading Challenge start with just $1,500 or $3,000.
In this article, I’ll cover exactly what the pattern day trader rule is and how to start trading without it getting in your way.
What Is the Pattern Day Trader Rule (PDT), Exactly?
According to FINRA (the Financial Industry Regulatory Authority), a pattern day trader is someone who buys and sells a stock position within the same day, four times or more within a five-business-day window.
To open and close a position more than four times within five business days, you need to hold at least $25,000 in your account. You don’t necessarily need to have that amount in cash — it can be a combination of securities and cash.
But if your total account value drops below $25,000, your broker can stop you from making any more trades until you bring your balance back up.
Back in the 1970s, the minimum equity requirement was only $2,000. But with changing technology, it’s a lot easier to quickly get in and out of trades within a single day. So regulators increased the limit to $25,000, mostly in an attempt to protect new traders from themselves.
So How Can I Trade Stocks With Less Than $25,000 in My Account?
So if you only have $1,000 to start trading, you can’t start trading stocks? Not true!
Like so many aspects of dealing with the stock market, it simply requires a shift in your trading psychology.
The PDT rule just means you need to more disciplined and wiser about the kinds of trades you make.
Only Make Three Day Trades Within a Five-Day Period
If you only make three day trades within a single five-day period, you’re not required to keep the $25,000 account minimum. Why’s that? According to the rules, you need to make four trades within the period to be classified as a pattern day trader.
If you make less than four trades per five-day period, you’re good!
But that means you have to make less than one trade per day. That can feel really restrictive for some traders. For example, you won’t be able to effectively scalp trade if you’re in this position. So you may need to change up your overall trading plan a bit.
But look at the positive side: It can make you a lot more selective about your trades. And you won’t overtrade.
This limitation can actually help you avoid the addictive nature of the stock market, where you feel like you should jump in and out of positions just because. Reality check: most of the time you have no business being in those trades anyway.
Hold Stocks Overnight and Buy Late in the Day
A position that you hold overnight is exempt from the PDT rule. By definition, if you hold on to a stock overnight, it’s no longer an intraday trade.
A lot of new traders I talk to buy stocks later in the day, around 2 pm or later. Then they sell the next morning. It’s not the number of hours you hold the trade, but whether you buy and sell between the market’s open and close on the same day.
If you buy a stock at 10 a.m., you’re stuck holding it longer to sell it the next day. And that can be riskier. Buying stocks late in the day and holding them overnight can be similar to buying and selling a stock within a few hours on the same day. The only real difference is that you’re exposed to a bit of extra risk from any news or announcements that could affect the stock after the market closes.
Play Longer Trends With Swing Trading
Of course, holding trades for short periods of time isn’t the only way to trade…
You can look for larger and longer-term trends, then enter swing trades that you plan to hold for longer than one day. Instead of trying to take advantage of a one-day trend, swing traders might hold on to a stock for days or even weeks. You’ll have a stock on your watchlist and monitor it for the optimal time to jump in.
By changing to a longer-term trading strategy, you can avoid worrying about the pattern day trade rule altogether. You can still trade in a fairly active manner without needing to have the $25,000 equity requirement for short-term trading.
Trade Internationally for More Flexibility
The pattern day trader rule specifically applies to U.S. broker accounts. Not all stock markets in other countries have the same day-trading rules as America.
So you can look into trading on stock exchanges in other countries, like the TSX in Toronto or the FTSE in London. Even if they have similar rules surrounding day trading, it still gives you somewhere else to trade once you hit your three intraday trades for a five-day period on the U.S. markets.
There are other benefits as well, such as taking advantage of different time zones. Trading internationally might fit your schedule better…
Maybe you have a young kid, so you want to trade on a market that’s open in the evening after you tuck your tyke in for the night. And if you work a full-time job during the day, you can actively trade other markets that are open at night.
Beware, please. Trading internationally can be complicated. Speak with both a legal and tax professional and do your research before you make any foreign moves.
Up for a Challenge?
I’ve tasked myself with teaching what I know to create a new set of world-class traders. You don’t need to be a math whiz to get started — I’m certainly not.
Don’t have a ton of experience? That’s OK. You can learn from my knowledge and experience. I’m happy to share what I’ve learned in 20 years of trading.
I started off with a gift of just $12,000 from my parents that I grew to a portfolio of more than $1 million dollars!*
My Trading Challenge is structured in a beginner-friendly and easy-to-understand format. You work to find trading strategies that suit your trading style and your lifestyle. Once you’re inside, you can learn the same strategies used by some of my awesome students. You’ll also learn to think for yourself in the markets, not follow some sheep mentality.
Here’s the real question: Do you think you have what it takes … are you up to my challenge?
The Bottom Line
If you’re thinking about starting to day trade stocks, you need to be aware restrictions like the pattern day trader rule.
If you’ve got less than $25,000 in equity in your brokerage account, you’re limited to making less than four intraday trades within any given five-day period.
The good news: There are trading strategies to help you get around the rule, such as holding on to your trades overnight.
And if you’re a newbie, maybe this rule isn’t a limitation … I challenge you to focus on making three or fewer high-quality trades per week. When you’re new to the stock market, you should spend the majority of your time observing and learning how different patterns and strategies work.
Then you can focus on only buying and selling the best opportunities you come across.
How much is in your brokerage account — do you trade small like me? What strategies do YOU use to get around the pattern day trader rule? Let me know in the comments!
