Building a small trading account up isn’t easy. Some rules, like the Pattern Day Trader (PDT Rule), make it even more challenging for traders with small accounts.
What is the PDT Rule?
It’s a rule that applies to day trading. A day trade is when you buy a stock and sell it that same day. For example, if you buy Aurora Cannabis stock at 10 AM and sell it at 3 PM the same day, that’s a day trade.
If a trader executes four or more “day trades” within five business days, provided that the number of day trades represents more than six percent the total trades in a margin account for that same five-day business period. Furthermore, your broker may label you a “pattern day trader” if it “knows or has a reasonable basis to believe” you’re day trading on margin. Under the rules set by the Financial Industry Regulatory Authority (FINRA), a pattern day trader must maintain a minimum of $25,000 on any that the customer day trades.
If the account falls below the $25,000 threshold, the pattern day trader will not be allowed to day trade until the account is restored back to $25,000. If you break the PDT rule your broker will typically lock your account, limiting you only to exit positions. The lockout period could last anywhere between one to four months depending on who your broker is.
As you can see, trying to be an active trader is difficult when you have an account under $25K, because you are limited to four-day trades for every five business days.
Beat the Pattern Day Trader (PDT) Rule
Now, if you want to be active in the market, then you need to think strategically if you are trading a small account. I know this all too well, after all, I recently took three separate small accounts and returned 220%, 275%, and 600% respectively.
(Building up a small account is what I specialize in, click here to learn my system.)
How do overcome such a huge hurdle like the PDT rule?
Simple. You limit the number of day trades.
But here’s the thing, many of the penny stocks that are high flyers may only move for a few hours to a few days, buy and hold is simply not going to work.
Instead, I look for opportunities later in the day let’s say 3 to 3:30 pm. If the trade works out, I can be out of it in the morning and then have the rest of the day to enjoy my family.
Types Of Stocks To Trade
I like penny stocks because on any given day they will be among the most active and largest percentage gain movers. However, many of them may have moves early in the day and then reverse.
The most actively traded and largest advancing stocks are catalyst-driven. That said, it takes time for the market to decipher the headlines and what impact it will have on the company’s stock price. Some penny stocks experience near-term momentum from “the pump” only to later fade (and potentially draw down negative). That’s why it makes sense to avoid trades early in the morning if you are limited to the PDT rule.
Why is the afternoon better?
Well, you are working with some data. For example, if I start scanning for some stocks at 3 PM, I know what those stocks have done volume wise. I like to find stocks that have a high average volume, but more importantly, stocks that are trading well above their daily trading volume. And if these stocks are in-play the next morning, I could be looking to take 20% from the overnight gap.
(Here’s one of my favorite looking charts, rinse and repeat, click here to learn more)
That said, we’re able to beat the PDT rule by turning our day trades into swing trades. And by doing that, it leaves room to day trade fast-moving stocks on some occasions.
The PDT Rule is a stubborn rule put in place by the regulators to protect brokers and traders with margin accounts. Of course, it makes trading more difficult for those who have accounts smaller than the $25K threshold. However, there are ways around it. My favorite way to do it is to wait for late day entries. The idea, stocks that are strong late in the day are like experience strength the following morning.
The next step is figuring out which stocks to trade and how to find them, if you’d like to know more about how I do that, check this out.