Having automated stock trading systems can definitely make investing a quick and hassle-free process. However, care must be observed not to violate applicable trading rules especially when you’re too blinded with excitement when there are so many great investing opportunities at the same time or within the same day. For example, if you’re identified as a pattern day trader (PDT), accidentally violating the so-called Pattern Day Trader Rule can happen more than simply toeing the line.
What is the PDT Rule?
The Pattern Day Trader Rule is essentially a trading rule set by the Financial Industry Regulatory Authority (FINRA) in 2001 as an industry standard governing those who are identified as PDTs in order to reduce risk. This rule also discourages excessive trading, which can be possible because of auto trading systems. More specifically, this regulatory standard requires PDTs to have at least $25,000 in their brokerage account, which can be a mix of cash and eligible equities, and restricts those PDTs with cash equity in their account falling below the $25,000 minimum from completing any day trades until the account is brought back up to the mandated minimum level.
Who is considered a PDT?
A PDT is a regulatory designation set by FINRA for a trader or an investor who carries out at least four day trades (i.e. large volume of trades capitalizing on market price actions within a day) using the same margin account over a period of five business days. The number of day trades should represent at least 6% of the total trade activity in the margin account within that five-day duration.
A PDT differs from an occasional or standard day trader in terms of the number of completed day trades within a length of time and in the minimum assets required to be maintained in the marginal accounts. Whatever the type of day trader you are, making use of auto trading systems can greatly assist in making timely and well-informed buying, selling and trading decisions to take advantage of volatile market prices within a day.
Your broker will automatically designate you as a PDT once the minimum FINRA conditions are met. It’s generally easy not to violate the PDT Rule since your broker will notify you once you’re flagged as a PDT but if you ignore your broker’s notice, you could have your account frozen and/or your trading activities hindered. This can be a real hassle because you may incur losses on your short positions in bear stock trading or on your long positions in bull stock trading when your investments fall way below your profit line by the time your PDT Rule violations are rectified.
Furthermore, while FINRA sets a minimum of $25,000 in the PDT’s account to execute more than three-day trades within five business days, individual brokerage firms have the option to set a stricter rule. On the other hand, some traders voluntarily designate themselves as a PDT.
How to deal with PDT Rules
While you shouldn’t necessarily be concerned when flagged as a PDT, there are strategies to avoid the hassle associated with the FINRA rules.
- Restrict yourself to executing only three day trades within a week whether you’re bear or bull stock trading
- Because your number of trades is limited, make use of automated trading alerts such as the Trade Warrior Bundle to ensure you’re only grabbing the most profitable trading opportunities available in real time
- Maintain at least $25,000 in your margin account just in case your excitement causes you to complete more than three day trades in a week
- Always read your brokers’ notices so you can take immediate action in case you’re flagged as a PDT
- In most cases, you need to inform your broker about removing your PDT status if you have not been trading as frequently as before.
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