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Wednesday, April 9, 2014

Question: "How Should Small Accounts Avoid the PDT Rule?"

There's no denying that the pattern daytrader rule causes huge frustration for many new traders. I often get questions about how to best deal with this rule. While I can't advise you on what decision you should make, I can outline the route that I took when I first started:
  • Open Multiple US Accounts
In the US, you are limited to three daytrades every five business days. If there are certain US brokers that you have your heart set on, one option is to open multiple accounts. That way, you get three daytrades at each broker. This is the strategy I used when I first started. I had accounts at ThinkorSwim, Speedtrader, and Interactive Brokers. Interactive Brokers does have a $10,000 minimum to open the account, but once it is opened, you can immediately pull most of that money if you so choose. There is no minimum balance requirement to my knowledge. By using three brokers, I got nine daytrades every five business days. Once I reached a total of $25,000, I chose which broker I was happiest with (at the time it was Speedtrader) and merged all of my money into that account.

I will not tell you which option is best for you. This is an example of something that is best to learn for yourself. I believe both can be good options, though, so take a shot with one of them - and if it's not working, don't be afraid to change it up! 

34 comments:

  1. Great advise again....thx Tim G.

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  2. Hi Tim. Does the PDT rule apply to cash accounts also? I was under the assumption that this is a margin account rule but not sure. Thanks.

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    1. Good question, I'm actually not sure. Cash accounts are a bad option because it takes a longer time for the funds to settle after closing a trade

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    3. I have a cash account at TDA. It is not under the PDT rule, but it takes 3 days for funds to settle after you closed the trade. It's actually better than margin imo (unless you want to short), cause if you have $10000 you can work with $3333 every day, making as many trades as u like. But I guess that's up to everyone's style. Hope this helps

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    4. Does not apply to cash accounts. But can take 3-5 business days to get your profits from trades.

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    5. Does not apply to cash accounts. But can take 3-5 business days to get your profits from trades.

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  3. Tim in the case of interactive brokers, did you mean we can put money in the account and pull some out after ? Sorry maybe i misunderstood.

    All the best

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    1. Nice! Also, If you are 26 or less, you can open an account for only $3000 at IB. I emailed them to be sure, and they confirmed.

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  4. No, PDT does not apply to cash accounts. However, with a cash account you can't "freeride". Freeriding is failing to pay for a security before you sell the security in a cash account. I.E. You must wait T+3 (3 days AFTER your trade date) for the money to settle. After that, then your cash will be available to trade with.

    Source: http://www.finra.org/investors/smartinvesting/advancedinvesting/daytrading/p005906

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  5. I see. Thank you for clarifying.

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  7. Has to do with small accounts in a way, my dream is to be able to make a living by trading from home but I have to work 7-3, what suggestions can you give me to start a transition.

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  9. if you open an IB account in canada does the PDT rule still stay in affect?

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    1. I think so? Best to ask their customer service that

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    2. I emailed them and they said it does not apply.

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  10. Thanks for taking the time to share so much valuable information Tim! Much appreciated.

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  11. Tim thank you & God bless. You are god gift to people like me who are straggling to build thier small acount. with all this valuable information you're providing us you're are my hero and keep it up the wonderful job you doing and may god bless you with all your success.

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  12. PDT is so incredibly limiting and frustrating, as you pointed out. Paradoxically, it actually encourages riskier trading; I will often hold a position overnight just to avoid the rule, and this exposes me to greater volatility around market open and close than if they would just let me day trade.

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  13. There is only one good thing I can say for the PDT rule: it forces you to be selective. I also see one day trade as being insurance to exit a bad position I may have intended to hold overnight but which breaks trend, so I will only use 2 day trades every 5 days as "intentional" day trades and keep the third as insurance. The only solution is to build the account and be done with this rule....

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  15. Don't you have to pay monthly fees for every account you open? I was reading a blog who used sure trader and said it cost $124\month,they also said sure trader was one of the less expensive brokers, but for argument's sake let's say you open 3 accounts at that rate you would be paying about 375 each month to keep them open. If you only have $1000 to start trading with the fees would eat your account before you could even get started, or should someone who only has that much not even bother to start trading?

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    1. The PDT rule doesn't apply to SureTrader as they are on offshore broker so you wouldn't need to open 3 accounts with them. But yes, you have to be careful with fees when you have a small account size. This doesn't mean you can't/shouldn't trade, it just means you need to be intelligent and a little more aggressive. If you can capitalize off setups with the best chance of success and highest risk/reward ratios you can build a small account.

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  16. Regarding Cash accounts? I Assume the 3 Day settlement period only applies to the money you spend that day? So for example: if you had $4,000 in a Cash account and you buy, and sell one stock using only $1,000, you would still have 3,000 available for the next day of trading, as you wait for the 3 day settlement period on the $1,000? Is This correct? Thanks

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  17. i thought u started with $1500 based on steve harvey interview so howd u put 10K in IB

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    1. answer is here http://tradetheticker.blogspot.com/2014/01/my-early-days-of-trading-and-challenges.html

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  18. Thanks a lot for all this information I know sharing your invaluable knowledge is a sacrifice that reaps certain rewards but is time-consuming. I do have one question though if I may and obviously you are very busy so I am open to others comments. My question is the following: I am a US citizen but I reside in the Dominican Republic which broker should I use for a small 1 - 2 thousand dollar start-off account that has a demo or paper trading application? Been looking at suretrader but not sure, no pun intended. Thank's

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  19. Hi there! From what I read so far, this PTD rule only apply to stocks and futures? If you trade Forex, you can have more than 4 trades per day?

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