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.
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:
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- firstname.lastname@example.org
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!