You DO NOT need $25,000 to Day Trade!

Pattern Day Trader Rule:

Due to the fact many beginner traders are afraid of the Pattern Day Trader Rule, let’s make sure we fully understand it.  By definition, a pattern day trader is a designation for traders or investors who execute four or more day trades (open & close a position in the same day) within five business days and in a margin account. Consequently, if you have a margin account, and make four or more day trades within that five day time frame, it is a FINRA requirement to have a minimum balance of $25,000 in your brokerage account.  Key phrase: AND IN A MARGIN ACCOUNT!

How to avoid the Pattern Day Trader Rule:

The easiest way around the pattern day trader rule is to trade in a cash account.  Thus, you will be required to trade within the means of your account or violations will occur.

The Securities & Exchange Commission have specific regulations regarding when funds are available after a sale.  Although the funds will appear immediately, in your account, you will not be able to withdraw for 3 days.  A general rule of thumb is not to purchase additional shares until the funds settle.

Hypothetically speaking, the general rule of thumb was forgotten, and you execute a purchase with unsettled funds. In doing so, you are now UNABLE to sell those shares until the initial settlement has occurred. Subsequently, if a sale occurs it would be considered a, “Good Faith Violation” which could result in your account being restricted from trading for a particular period of time.

Settlement Breakdown:

Stock (Shares) Settlement In Cash Account: 3 Days

Options Settlement In Cash Account: OVERNIGHT! Thus, any funds used for options day trades are available again for trading the next morning.

Therefore, if you would like to trade more than a few times a week, options are the desired route. Please see the example below:

 

Options Day Trading-Available Funds Example:

Account

Trade Cost

Available Remaining Trading amount

Cash Account Morning Value $0 $3,000
1st Trade of Day $1,000 $2,000
2nd Trade of Day $500 $1,500
3rd Trade of Day $1,450 $50
Next Day Reset (Assuming $0 made or lost) $3,000 $3,000

 

Please note, in this particular example, if we were trading shares in a cash account, we would only have $50 available to trade until the funds settle on the 3rd day!

I hope this was helpful for everyone! However, if you have any questions feel free to contact me at any time- contactus@slatertrades.com

If this content is of interest to you, and you would like to know more about day trading, please sign up for our beginner friendly stock & options trading course.

While speaking theory is entertaining and thought provoking please visit my YouTube channel, where you will find several successful trade examples.

See you there!

Thanks,

-AT

 

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