Are you executing trades too often that your broker is now warning that you will soon be breaking the PDT rule? On the surface, this isn't an issue, but if you break the Pattern Day Trader rule, your account will have to have at least $25,000 in value to keep trading. Otherwise, you can only sell any current positions and wait 90 days for the broker to remove the PDT classification from your account to make new trades.

PDT Rule

First, the PDT rule was created by FINRA to prevent retail traders from losing too much money. In essence, a trader with less than $25,000 in their account can't make less than three days in a five trading day period. This rule can be a significant roadblock for small traders to do well in the market because they are required to pause their ability to capitalize on new opportunities. While this is a problem, let's explore ways we can go around this and still keep your account in good standing.

Open Multiple Accounts

The easiest way to fix this problem is to split your funds into multiple brokerage accounts. Each account you open has its own three trades every five trading days counter. Therefore, you can make three days on one account, then move to the next one and execute new trades there.

The downside of this strategy is spreading your funds too thin. You already have less than $25,000, and splitting funds will force you to take on smaller positions, limiting your gains.

This strategy works well for those with accounts close to the $25,000 limit that occasionally might dip under $25,000 and don't want to deal with brokers hassling them about the PDT rule.

Benefits

  • Each new account gives you three days per week.

Drawbacks

  • Will be forced to take smaller positions.
  • Managing funds across accounts is a problematic accounting task.

Use a Broker Outside the United States

Using an offshore broker is helpful when you want to bypass the PDT rule because FINRA doesn't regulate them, which is an excellent way for small traders to utilize their entire capital in one account.

An added benefit is receiving higher leverage ratios than those provided by US-based brokers. The typical leverage ratio provided by offshore brokers is around 6:1.

However, since the broker is outside the jurisdiction of these agencies, you are giving up all protections offered to retail traders. Therefore, you must consult with tax and legal professionals to research and understand the rules you and your broker must follow.

Benefits

  • Utilize all capital in one account.
  • Get access to higher leverage ratios.

Drawbacks

  • Lose retail trader protections.
  • You need to research rules and limitations that apply to yourself and the broker.

Execute Swing Trades

Quickly, swing trading is executing a trade held over days or weeks instead of minutes or hours. Swing trading might not sound like a direct strategy to circumvent the PDT rule, but it gives you a legit way to find trends in a broader time frame. Also, having more extended time frames allows you to confirm your trading strategy and get more significant returns on capital while arguably mitigating losses.

Benefits

  • Utilize all capital in one account.
  • Test trading strategies.
  • Potentially better returns on capital.
  • Mitigate losses more easily.

Drawbacks

  • Not able to day trade.
  • Miss out on intraday volatility.

Use a Cash Account

Cash accounts aren't subject to the PDT rule. Sound great, right? While you can make as many trades as you want, the catch is you can only make trades with settled cash.

Your next question is, what is settled cash? For that, we need to understand the cash settlement rules created by the SEC. Essentially, when you sell a position, the cash needs to settle or finalize, which is two days from the day you sell. This mechanism is known as the T+2 settlement cycle. Once settled you can again access that cash to start new trades. Here's an example, you sell a position on Monday, the transaction would settle on Wednesday, and you can have funds to trade on Thursday.

Benefits

  • Make unlimited day trades
  • PDT rule doesn't apply.

Drawbacks

  • Wait for trades to settle.
  • Can only use settled cash to make new trades.

Futures Trading

Futures are contract agreements that bind a trader to buy or sell a specific number of units of the underlying asset in the future at a predetermined price and date. Traders speculate on the underlying asset's price movement and make a profit on the delta, the difference between the contract price and the actual asset price.

Futures bypass the PDT rule because they are outside the regulatory scope of FINRA. Instead, futures are regulated by the National Futures Association and Commodities Futures Trading Commission, which means the same requirements do not apply. Essentially, you can make unlimited day trades in futures even if your account has less than $25,000.

Benefits

  • Make unlimited day trades
  • PDT rule doesn't apply.

Drawbacks

  • You can only trade futures.

Options Trading

Options are contractual agreements between a buyer and a seller which give the buyer the option to buy or sell a specific asset at a predetermined price and date. For example, when speculating on the price of a stock, traders purchase options to leverage their position, which have the potential to make outsized gains compared to the required invested capital. Since options are very different from traditional stocks, be sure to get an in-depth understanding into how they work before executing any trades.

Unlike stocks, which settle in two days, options get settled overnight. This quick settlement is excellent because now your cash is ready to use the next day for any new trades.

Benefits

  • Make unlimited day trades
  • Cash settles overnight.
  • PDT rule doesn't apply.

Drawbacks

  • You can only trade options.

Bottom Line

While initially, day trading does require a substantial amount of money to start, there are plenty of great ways to avoid the PDT rule and still potentially make money in the market. Before deciding on any strategy, be sure to understand the concepts of day trading, and consider your risk tolerance to fully understand every option.