If you’ve ever wanted to get into day trading but decided against the idea because of the pattern day trade rule, think again. There are multiple ways to legally and ethically get around the regulation. First, you need to know exactly what the law is, why it was written, and what the common ways are for investors to side-step it. Keep in mind that doing so is similar to tax avoidance, a completely legal practice of paying only the taxes you owe.
Accountants and other financial professionals are happy to advice clients about tax avoidance, but not tax evasion, the illegal dodging of tax laws. So, now that you know it’s fully legit to avoid the most stringent of day trading rules, here are the ways to do so.
Know the Basics
You have to understand that the pattern day trader rule was written to protect investors from large, fast losses. It requires you to have at least $25,000 in your margin account if you want to do more than four round-trip trades in a five-day span of time.
Make Three or Fewer Trades Per Week
The first thing to keep in mind is to simply make three or fewer round-trips each week. That means you’ll have to do plenty of research about each purchase, put enough capital into the deal to show a profit large enough for your goals, and never accidentally go over your limit of three deals in a week.
Use Cash
If you look at the wording of the regulation, it mentions only margin accounts. If you deal only with an all-cash brokerage account, no matter how much money you keep in it, you can trade all you want.
But know that most brokerage firms are rather slow to settle funds after you close a position. For instance, if you earn $5,000 profit on a trade at closing, that money won’t show up in your account ledger for at least two business days.
Slow settlement can bite you when you only deal with cash, unless you have enough of a cushion to continue trading during the interim.
Try the Futures Market
If you enjoy trading futures, you can do so on margin, and with as much or as little money in your account as you want. Plus, you can make as many trades as you wish, round-trip or not, every day of the week. Why? Because futures are not part of the PDT regulation. It only applies to stocks and options.
Find Three or More Brokers
Another piece you’ll find in the fine print is there’s no restriction on how many brokerage accounts you can have. The limit of four round-trips only applies to a single account-holder with a single brokerage. For years, since the PDT law went on the books back in 2001 to try and reduce the risk, investors have used this simple method for taking part in well more than three round-trip trades in a business week.
Use an Offshore Dealer
You won’t have all the insurance and legal protections when you use a non-U.S.-based brokerage firm, but you also won’t have to worry about the PDT restrictions. It’s not always a good idea to work with offshore service providers, however. If they go bankrupt or disappear with your funds, you have virtually no legal recourse.