The Pattern Day Trading Rule, also referred to as Pattern Day Trader or simply PDT, is a significant barrier for small account traders interested in high-reward, high-risk methodologies that go beyond swing trading. The PDT rule was conceived by the Financial Industry Regulatory Authority and the U.S. Securities and Exchange Commission to restrict traders with margin accounts under $25,000 who execute four or more day trades within five business days.
For traders who rely on margin accounts to leverage their buying power, the PDT rule can feel like a huge obstacle that limits their ability to buy and sell stocks within the same day. For those with small accounts, below the 25k threshold, the PDT rule can force traders to rethink their entire trading strategies to avoid penalties.
In this article, we will explore the mechanics around the PDT rule, why it exists, its history, and workarounds to avoid PDT restrictions. The focus is to help you optimize your number of day trades to avoid the PDT rule and have a smoother trading journey.
According to the FINRA, and approved by the SEC rules, the PDT rule created in February 2001 defines a trader as a pattern day trader if they execute four or more day trades within five business days in a margin account. This is assuming that these trades exceed 6% of their total trading activity during the period.
The PDT rule applies mostly to traders using margin accounts with less than $25,000 in their trading account who execute four or more day trades within a period of 5 business days. A margin account allows traders to borrow money from their brokers to increase their purchase power, allowing them to profit big, but also increasing risk exposure.
There are five main methods to avoid PDT restrictions. Each method comes with its own set of strengths and challenges. Those workarounds allow you to maintain flexibility without needing a minimum balance of $25,000. Depending on your capital, experience, and trading style, you can find a method that suits you.
Cash accounts allow traders to trade stocks using their own money, without borrowing funds from the broker, making them essentially exempt from the PDT rule. Differently from margin accounts, which offer leverage to amplify purchase power, a cash account restricts traders to trade with the cash they have available.
Using multiple brokerage accounts is a workaround to increase the number of intraday trading by distributing capital across several margin accounts, each with its own five-business-day limit under the PDT rule. If you only have $10,000 to day-trade, you can open four accounts with $2,500 each and diversify your trading activity across these accounts. This is a smart way to avoid the pattern day trader flag, allowing you to day trade three times a week with each account.
As previously mentioned, the PDT rules are limited to stock trading and equity options. Traders are effectively free to engage in futures trading, crypto trading, and forex trading. With forex, very little money is needed to start, usually around $500, and leverage is as high as 50:1. Futures trading, on the other hand, might require somewhere around $1,000 to $5,000 per contract, with an increase in volatility and risk, which gives a lot of room to profit from price action. Crypto can be traded on platforms like Coinbase, and it is totally exempt from PDT rules but requires a lot of research into different market behaviors.
Unlike day trading, swing trading is a methodology based on holding positions for days or weeks, completely avoiding the PDT rule, focused more on intraday action. Swing traders are more focused on capturing price swings over a longer period of time, usually relying on technical analysis and chart patterns to identify entry and exit points over longer timeframes.
Proprietary trading firms allow trading to use leverage by trading with the firm’s capital, exempting them from the $25k minimum balance requirement. These firms enforce strict risk management planning while offering sophisticated trading platforms and mentorship for those who pass their evaluation challenge. In exchange for providing its resources and capital, the prop firm keeps 20 to 50% of profits.
The table below provides a simple comparison between all five methods displayed above to work around the PDT rule.
| Method | Complexity | Costs | Legal Risks | Speed of Fund Access | Suitability |
| Cash Account | Low | Usually low. There are fewer financial requirements to start | Low | Slow (T+2 settlement) | Day traders who are fine about not relying on margin trading and leverage |
| Multiple Accounts | High | High. Increased fees and other related costs per brokerage firm. Each firm might have their own fee structure and policies, making the costs even higher and more complex | Medium (Beware of offshore brokers) | Fast | Highly active day traders who are able to keep themselves organized across several different trading accounts |
| Non-PDT Markets | Medium | Vary according to the market. Some markets may require more capital to start, such as futures trading | Medium (Beware of platforms and your local regulatory requirements) | Fast | Traders who can adapt to different markets and methodologies |
| Swing Trading | Medium | Low. Fees and costs can be much lower than those involved in day-trading | Low | Slow (profits can take days or weeks to be realized. Some platforms also follow similar structures of T+2 settlement) | Patient traders, especially those with long-term focus |
| Prop Firms | High | High. You might have to pay to go through an evaluation process and end up not passing | Low | Fast | Experienced traders who have discipline to follow strict risk management goals |
Overall, the PDT rule was created as a means to protect the financial system, retail traders, and brokerage firms. It is important to know that this system exists because the traders of the past faced difficulties with volatility and unexpected price swings while overleveraging. Still, it is understandable how it can feel a bit limiting to some.
