Wednesday, December 23, 2009

Is the pattern day trader rule hindering your trading?

Is the pattern day trader rule hindering your trading?

For those of us that either start with a small broker account or just have less than $25k in your broker account, are subject to this rule. First what is a pattern day trader, pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as any customer who executes 3 or more round-trip day trades within any 5 successive business days. A round trip means if you buy a stock and then sell that stock in the same trading day is considered one day trade or one round trip. You are given 3 of these day trades for every 5 business days. If your account is greater than $25k, than you don’t have anything to worry about.

What is the purpose of this rule?
This rule came into effect February 27, 2001, by the Securities and Exchange Commission (SEC). The purpose of this rule is to basically protect the small investor or trader from totally being ignorant in the market and being eaten alive by professional traders. I can see this rule being useful for an individual who is just starting in the game of trading (yes I think it is one big game) and slows down that persons losses and prohibits him from losing a lot in a short period of time.

Now for those of us that have been trading for some time and have gained quite a bit of experience in the market and are not totally ignorant when it comes to investing but has less than $25k in our accounts, this rule just slows our progress in building a bigger account and breaking out of this rule.

Now for the good stuff!
I talked to my broker and asked if i could open up a second account with them, and in doing so would I still be subject to the PDT rule for both accounts combined. For example, if i used my 3 day trades in one account and switched over to my other account would I have 3 trades for that account or would I have 3 day trades for both accounts together. Well come to find out, opening that second account does in fact gain you 3 extra day trades. So if you only have $10K to start your investing or trading account you could split that into two accounts and now you have 6 day trades for every 5 business days, now that is pretty cool! Well of course you could open more and have more day trades but then you are pushing it, 6 day trades for one week is plenty IMO.

So now if you used up your 3 day trades half way through the week, and you bought into another stock you then have to hold that overnight regardless if it tanks on you. With this option you could use your 3 day trades, then with a click of a mouse switch to your second account and now you have 3 fresh day trades to use.

Hopefully this will help those seeking an alternative route around this rule.

If interested in learning more about day trading in general i suggest A Beginner’s Guide to Day Trading Online (2nd edition)

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