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.
Day trading is a methodology used in financial markets that involves buying and selling the same security on the same day. It is often considered a high-risk, high-reward technique, generally indicated for experienced traders with advanced knowledge of trading strategies, such as scalping, and managing drawdowns in trading. According to the FINRA, a trader must maintain a minimum of $25,000 in their brokerage account before any day trading activities begin.
The FINRA established the Pattern Day Trader rule as a result of the dot-com bubble of 2000, when the market rallied due to the adoption of the Internet and explosive growth of tech startup stocks between 1995 and March 2000. Many inexperienced retail traders leveraged margin accounts to day-trade volatile stocks, resulting in margin calls and huge financial losses when the market finally collapsed by the early 2000s. Aiming to protect retail traders and brokerage firms, the FINRA and the SEC implemented the PDT rule to ensure only those with sufficient capital could engage in higher-frequency trading activities like day trading.
The reasoning behind the Pattern Day Trading rule is legit. It mitigates risk and reduces the likelihood that both traders and brokerage firms will incur unsustainable costs. However, it can still limit trading opportunities for small account traders, propelling the need for strategies to avoid being flagged as a pattern day trader.
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.
If a trader with a trading account balance of $10,000 buys and sells stocks on Monday, Tuesday, Wednesday, and Thursday sequentially, their account will be flagged as a pattern day trader by their broker. As soon as they’re flagged, they must maintain a minimum balance of $25,000 to keep day trading. Once an account is flagged, it tends to remain so. It is relevant to note that pattern day trading rules are limited to stock trading and equity options trades.
If, after being flagged as a pattern day trader, the account’s balance remains below the 25k threshold, the account is frozen for 90 days, and the trader cannot make any further trades. Some brokers may offer the opportunity to reset the account’s flagging as PDT, but the account may face even harsher measures if flagged again, including suspension.
Overall, the policies vary from broker to broker. Some may even be more strict than the FINRA’s rules. They could flag a trader with less than four trades if they consider the trader to be incurring excessive risk. Depending on the broker, the flagged trader can request a removal of the PDT flag if they refrain from day trading for 90 days. The decision, however, belongs to the brokerage firm, and a request is not a guarantee that the account will go back to normal.
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.
Essentially, traders are free to day-trade as much as they want to, but their profits—and risk—will be significantly lower than that of a margin account. It is important to remember that another con of cash accounts is the T+2 settlement rule, where traders have to wait two business days to have full access to the funds from a trade. In practice, if you buy and sell a stock on Tuesday, the funds will be settled by Thursday.
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.
The downsides of this strategy, however, are that some brokers have minimum deposit requirements. Some require $2,000; some require more; others less. Besides that, managing multiple accounts at the same time is more complex than it seems. Once you have a bunch of different accounts, you will have to monitor positions on each one of them and keep track of commissions, fees, costs, and taxes.
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.
Each one of these markets comes with its own complexities. Forex is open 24 hours a day and requires a lot of macroeconomic analysis, beyond technical analysis. Futures demand a deep understanding of commodities and indices. Crypto, on the other hand, is highly speculative and requires a lot of study into different coins and their uses. It is also a good idea to avoid crypto if you’re prone to FOMO—fear of missing out—as many coins tend to have explosive gains only to go down to near $0 as fast as they rallied.
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.
Adapting to swing trading is not as hard as it seems. Instead of focusing on fast-paced price swings, you focus more on daily and weekly charts. Studying the basics of swing trading can help you do a smooth transition.
Some pitfalls of swing trading involve the risk of overtrading and failing to set stop-loss orders correctly—either positioning them too far away or too tight to the entry point, among others. There is also a much slower pace to realize profits, which can be a bit frustrating for those more used to the fast, quick dynamics of day trading.
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 selection process to join a prop firm requires you to pass their evaluation phase, which tends to involve trading a demo account to demonstrate your profitability and adherence to the firm’s risk management plan. One of the cons of this method is that not all prop firms are reliable. It is fundamental to research, talk to other traders, and ask the community to confirm a firm’s reliability. We have a guide on how proprietary trading works and how to achieve success as a funded trader on our blog.
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.
Deciding which method to adapt to for avoiding being flagged as a pattern day trader depends on your risk aversion, trading strategy, and knowledge of technical analysis, fundamental analysis, and macroeconomic analysis. We can also use thresholds to help you choose a path:
Regardless of capital, prioritize risk management and stay alert to the rules to avoid penalties and restrictions. Small account traders can definitely achieve success with the right strategy. Limitations can become a golden opportunity to develop discipline and profitable trading systems.
