Pattern Day Trader Rule Part 2 – Protection
In the last blog post I talked about what the pattern day trading rule is and how your account becomes flagged as a pattern day trader. Now that we know the big problems it can create for traders, lets discuss how you can protect your account from being frozen.
Ways to Protect Yourself from the Pattern Day Trader Rule
- If you have the pattern day trading flag on your account, one thing you can do is ask your broker to remove the flag because you are using a different strategy. Hopefully, a swing trading strategy.
Regulators will allow your broker to remove the pattern day trading flag once every 180 days. So you can call your broker and say you are using a different strategy now and ask them to remove the flag.
They will not be able to remove it again for another 6 months so its a good idea to use a great swing trading strategy and have at least 1 day trade left so you can exit a position the same day if it goes against you quickly after you enter. Always keep track of how many day trades you have left within your trading platform.
- You can use an offshore broker like Suretrader. Offshore brokers are not located in the US and are not regulated by the SEC so the pattern day trader rule would not apply.
Overseas brokers are great because they have less regulation. They are also more risky because, you guessed it, they have less regulation.
The only experience I have with Suretrader is with someone who was having a hard time matching the entry and exit prices in the 3 Stocks to Wealth strategy on investtobefree.com. We have a performance tracking spreadsheet where traders can quickly pinpoint poor fills to ensure they can closely match the performance before commission and fees.
This is the only email I have received from someone who had a problem matching the fills. I asked them what broker they used and they said Suretrader. It could just be a coincidence but you want to make sure your online broker is able to give you good fills.
You also want to consider whether you should have your money with a less regulated offshore broker in the first place.
- Another way to protect your account from the pattern day trading rule is to use a peer-to-peer broker such as ustocktrade. However, some stocks do not have enough peer-to-peer volume to trade using this type of broker.
- You can also choose to use a cash account rather than a margin account when trading. The PDT rule only applies to margin accounts. However, this usually requires you to wait for the 2 day settlement period before entering your next trade. If not, then its likely some form of margin account and the PDT rule will likely still apply.
This may be the best option for many traders. However, if an ideal opportunity comes up the day after you exit a trade, you will likely be out of luck because you have to wait 2 days to enter your next trade with the funds received when you sell a stock unless your broker has a policy where they front you the money for the next trade before the trade settles.
Also, this opens you up to possibly running into a good faith violation or other violation if your broker fronts you the money for your next trade. This could lead to problems like having to deal with a 90 day settlement period.
- In my opinion, the best way to avoid the PDT rule is to swing trade the best stocks out of the best technical patterns. Swing trading stocks under $10 is not the best idea as my experience over the past 10 years and every back-test I have performed shows a lower win rate on stocks under $20 and especially under $10.
Swing trading stocks under $10 is especially problematic as they often do secondary offerings after the stock has moved a lot higher. This is especially true on stocks in long-term downtrends such as shipping stocks.
So what often happens to newer traders is that they jump into a trade on a lower quality stock under $10 only to have to make the unfortunate decision to either get out of a sinking ship or have their account frozen. That is why we focus on better quality growth stocks that are almost always over $20.
The PDT rule can be very problematic – once you have the flag set on your account. Even if you have a larger account, day trading can quickly shrink that account below $25,000 which freezes your account immediately for new trades of any type. Another reason to learn a great swing trading strategy instead such as large triangle breakouts within very entrenched long-term uptrends on top stocks.
Beginner traders should be thankful for the pattern day trading rule because it forces you to be very selective in which trading opportunities you take part in. This is a key to success for most newer traders.
We like to trade only the very best opportunities such as ROKU breaking out of a high tight flag not once but twice this year before over 30%+ gains within a couple weeks.
Keep in mind that your account size does NOT matter when you swing trade. The pattern day trading rule only applies and freezes your account if you have 3 same day round trips within 5 trading days.
So be sure to always keep tabs on how many day trades you have left. Again, your trading platform should be able to give you this information.
Of course, the PDT rule will not be much of a concern at all if you choose a longer-term swing trading strategy such as the ones taught on this site and the opportunities featured in the alert service. These strategies are the most successful ones we have found over the past decade on top stocks on any price stocks.
They can also easily be executed while working full time with more peace of mind. The strategies fall somewhere between buy-and-hold and day trading and will allow you to easily avoid the pattern day trading rule and take advantage of higher percentage trades at the same time.