Understanding the Pattern Day Trader Rule

In today’s video we’re going to talk about the pattern day trader rule and really focus on one of the most common misconceptions.

  • Are you dealing with the pattern day trader rule?
  • Are you frustrated by it?
  • Have you ever run out of day trades?

Be sure to comment and let me know and I will reply to your comments and maybe help give you some guidance on how to deal with the pattern day trader rule.

I want to focus on one of the biggest kind of misunderstandings and misconceptions related to the pattern day trader rule. Real quick, most of you probably know, but you’re under the PDT, the pattern day trader rule, if you have less than $25,000 in your trading account.

So, there’s a lot of article about it. We’ll do more, I want to focus on one particular topic today and that is the three day trades you get in a rolling five day period. And I’ve seen many new traders get stuck and even sometimes get blocked from trading by their broker because they don’t understand some of these rules and the kind of little intricacies involved.

So many think that, when someone says you get three day trades in a five day period, they think it’s based on the Monday to Friday calendar. It is not and operating under that assumption can really get you in trouble.

Remember those day trades operate on a rolling five day period.

If you make three day trades on Monday, you can not make another day trade until the following Monday. If you make a day trade on Monday, another one on Tuesday, another one on Wednesday, you’ve now used all three of your day trades and you can not make another one until that following Monday. But that following Monday, you only get that one trade back.

So, keep that in mind. So then in this scenario, if you don’t trade Monday, come Tuesday you get the second one back. If you don’t trade Tuesday, you get the third one back. So, think of it almost as a running count. I almost think of it as like card you can flip over and as you flip over those cards, you’ve got to wait for that five day period to expire before you can put that card back in the deck.

If you kind of get that analogy?

Now, why is that important?

It is very, very important especially if you’re trading volatile stocks, like many of you probably are. You’re new traders, you’ve got a small account, you like the low price stocks that make the big moves.

The dilemma is, if you violate the PDT with your broker, they sometimes will not let you out of the position. So if you make four day trades in that rolling five day period, quite frequently, they will not let you close that position.

I know it sounds draconian, but that’s the way the rules work and if you’re long some 500% runner and it starts pulling back and you can’t exit because your broker will not allow you because you unwittingly broke the rules, you could turn a winner into loser, and a bad loser very quickly.

And this is the one that makes my heart sink and gives me nightmares. I’ve talked to some new traders that have been short a stock, ran out of their, violated the PDT and their broker would not let them exit that stock, and it breaks the high of the day and it breaks out, and it makes a huge move, and ultimately they can’t get out, they take a big lose when they exit the next day, and it cripples their account.

So, you need to be conscious of your day trades. All of your brokers, they’ll have a running total.

Make sure you know! Write it down, you know, keep it in your journal.

But, always know exactly how many day trades you have left. Now the last reason I want to focus on why this is so important, many brokers, and I have talked to
a lot of traders here too, if and when you violate that PDT rule, whether knowingly or unknowingly.

You could have simply made a honest mistake and forgot that you were out of day trades. Quite frequently, they will lock your account for 90 days.

So now, not only did you, here’s the worst case scenario.

You took a big lose because you made your fourth day trade in a rolling five day period, but then you get flagged by your broker, and your account gets locked for 90 days. So now, you’re on the bench, you can’t make any trades until that period expires.

So remember, biggest thing, it’s a rolling five day period. It’s not based on the calendar. Write that down.

The other thing and if you take away anything from this article, please never ever ever forget how many day trades you have left, if you’re trading these volatile stocks.

It will get bad quickly if you forget that. So, write it down, put it in your journal, whatever you need to do, do not forget!

Thanks for reading our article. Also, share with your friends. And if you’re looking to expand your trading knowledge, don’t forget to check out all of our other article.