The pattern day trader rule, often referred to as the PDT rule, is one of the most misunderstood stock market terms amongst many beginner traders.

This rule was established in 2001 by the Financial Industry Regulatory Authority (FINRA) and the U.S. Securities and Exchange Commission (SEC).

Today, we are going to focus on the rule, including some of the things you can do to get around it without using an offshore broker.  Now before we go any further, let’s reiterate the fact that day trading is risky.

This rule was put into place in part to protect novice traders from losing their money. Since the vast majority of traders lose money, you need to approach this with serious caution and with the expection that you could lose money.

For that reason, you should day trade in a simulator before you put real money on the line.  Now, with that said, let’s get into the PDT rule!

What is the PDT rule?

The PDT rule requires traders seeking to day trade more than three times in a rolling five-day period to keep a minimum balance of $25,000 in their margin accounts.

If an account falls below the $25,000 threshold, the trader is no longer able to execute any day trades until he/she backs up the account above that level.

FINRA defines a pattern day trader as any customer:

  • Who uses a margin account; and
  • Who executes four or more “day trades” within five business days in a margin account; and
  • Whose day trades form more than 6% of his/her total trading activity for the same 5-day period

The PDT rule was designed as a protective measure aimed at preventing traders from trading excessively in the stock market by limiting their trading activity.

This rule assumes that traders with over $25,000 in account equity are familiar with the accepted the risks that day trading entails. Traders found breaking the PDT rule risk having their trading accounts frozen for 90 days.

If you break the rule, you are most likely to get a nasty little message from your brokerage firm, warning and flagging you as a pattern day trader.

If you don’t have already a minimum balance of $25,000, you will get a margin call and have a 5-business days term to deposit more funds in your account and lift the balance to $25,000.

How to Get Around the PDT Rule

Below are the top two ways to get around the PDT rule:

  • Trade in a cash account
  • Trade offshore

#1 Using a Cash Account to Day Trade

Using a cash account is probably the easiest way to avoiding the PDT rule. The only set back with a cash account is you can only use settled funds.

This means when you buy or sell a stock in a cash account, the money takes 1 day (T1) to settle before you can use it again.

So for example, if you sold a stock on Monday those funds wouldn’t settle until Tuesday…Monday is the trade date then Tuesday morning the funds are available.

If you have a $1,000 trading account, buying 500 shares of a $2.00 stock would use all your buying power, and after selling that position you won’t be able to trade again until the following day.

However, for traders focused on building consistency, trading with a small share size in a commission-free cash account can be a valuable learning experience.

#2 Using an Offshore Broker

An offshore broker is not required to enforce the $25,000 PDT minimum. Many brokers, including Webull and Interactive Brokers, have international branches for their non-US customers. When a customer opens an account at an international branch, they are not required to meet the $25k minimum. However, they must be a resident of that non-US country. For US residents looking to trade with an international broker, there are only a small handful that will accept us. These brokers tend to be located in the Caribbean including in the Cayman Islands and the Bahamas.

An offshore broker will have lower minimum account deposit requirements (typically $500), will offer 6x leverage, and will not enforce the PDT rule. However, there are some drawbacks. With a non-US broker-dealer, you are no longer covered by US Federal Deposit Insurance, which would protect funds you deposit into a US brokerage account. Additionally, international brokers will charge high fees and commissions that will eat away at a small account. For most beginner traders, using a cash account until they are profitable is the best way to get started.

An offshore broker is a tool that is at your disposal but should be used responsibly and for a limited period of time due to its higher cost.

 

Bottom Line

If you have less than $25,000, you can still day trade without needing an offshore broker. The best way to get started is to use a Cash Account.