Pattern Day Trading Rules Confusing

[BigMoneyJim]

I'm a passive long-term buy-and-hold index investor, but while casting about for shelter-at-home hobbies to occupy myself I'm thinking of doing a little speculative short term trading.

But only as a diversion. The "$2,500 to $250,000" thread title I keep seeing here has me thinking $2500 would be enough to entertain, occupy, and educate me without changing my "real" and wholly boring investment strategy. (And it would be cheaper and less frustrating than some of my other hobby ideas.)

I'll be doing this inside an IRA so I don't have to keep track of all the gains and losses for taxes.

So the first thing I run into when looking into the pitfalls of day trading is the "pattern day trader" rules, and they're really confusing me. I'm not sure they apply to me at all, but I want to be sure I don't inadvertently freeze my account or lose the ability to redeem some index ETFs to top up my cash as I'm starting to draw on the IRA for early retirement.

I don't think the rules apply to what I want to do, because I'm pretty sure I don't have margin accounts, I'll be trading with a very small portion of my assets, and I'll have many times the settled cash in my trading account as any of my day trades at all times because that's where I'm keeping my cash for now.

So, if I'm making a few trades in a few days inside an IRA in one of the big brokerages, in a cash account, always having settled cash far in excess of the day trades, will I trigger any restrictions or other differences? Or otherwise make the automated self-service broker grumpy?

 

[ckelly78z]

After having my Charles Schwab account frozen for a period of time, I have figured out a few things. My account was penalized for trading with profits that weren't settled with Schwab yet (they generally settle the following day). I used profits from one sale to buy (and then sold another profit) in the same day.

I think their rules state that you can trade 5 times a week, which isn't a problem for most investors. If you maintain a balance of over $25,000, you can day trade.

 

[OldShooter]

... So, if I'm making a few trades in a few days inside an IRA in one of the big brokerages, in a cash account, always having settled cash far in excess of the day trades, will I trigger any restrictions or other differences? Or otherwise make the automated self-service broker grumpy?

Call your broker and ask.

 

[finnski1]

I've gotten messages from my IRA accounts (both fidelity and TD ameritrade)
stating that I would be subject to " patterned day trading" regulations if I had made more than one trade(a buy and a sell of the same security) in a single day 4 or more times in a rolling 5 day period.

So I could do 3 trades per 5 days without being flagged. This is for each account I have. Since I actually have a total of 5 separate accounts between the 2 I could theoretically make 15 trades a week without issue.

 

[finnski1]

After having my Charles Schwab account frozen for a period of time, I have figured out a few things. My account was penalized for trading with profits that weren't settled with Schwab yet (they generally settle the following day). I used profits from one sale to buy (and then sold another profit) in the same day.

I think their rules state that you can trade 5 times a week, which isn't a problem for most investors. If you maintain a balance of over $25,000, you can day trade.

I don't believe having $25,000 makes any difference. I have much more than that and have gotten the warning.

 

[LOL!]

The rules apply to everybody.

I think the consequences of being labelled a "pattern day trader" are practically nil if one keeps at least $25,000 of unencumbered money (settled investments or cash) in their account. And if your wrist is slapped, so what? It is not illegal to be a pattern day trader or any other kind of day trader as long as you still have money in your account that can be confiscated if you run up huge losses.

 

[njhowie]

So, if I'm making a few trades in a few days inside an IRA in one of the big brokerages, in a cash account, always having settled cash far in excess of the day trades, will I trigger any restrictions or other differences?

No.

 

[njhowie]

I don't believe having $25,000 makes any difference. I have much more than that and have gotten the warning.

https://www.finra.org/investors/lea...ng/day-trading-margin-requirements-know-rules

Under the rules, a pattern day trader must maintain minimum equity of $25,000 on any day that the customer day trades. The required minimum equity must be in the account prior to any day-trading activities. If the account falls below the $25,000 requirement, the pattern day trader will not be permitted to day trade until the account is restored to the $25,000 minimum equity level.

The key is that to be classified as a pattern day trader, we must be talking about a margin account. If we're talking about a cash account, then pattern day trading rules do not apply.

The rules adopt the term "pattern day trader," which includes any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period.

 

[Car-Guy]

25 to 30 years ago I was blocked from trading in my Schwab account for 90 days due to a trading violation(s). Basically, as I understand it, I was trading with unsettled funds and I didn't have a margin account. I've learned that there are a number of ways to get into trouble day trading. I don't know all the rules but "I understand" there are SEC rules that apply to all accounts and company specific brokerage rules that apply to that brokers company. Talk to your broker!

I have been told by my Schwab advisor that I have been "flagged" as a pattern trader and I still do not have a margin account which works okay for me. I like to gamble, but not with money I don't have.

 

[Blue531]

This is concerning a cash trading account. With the PDT rule, you cannot have more than three "day trades" in five rolling business days. So you are safe if you only do a "day trade" every other day pretty much. Or you could trade M T W and not on TH or FRI each week for example. A "day trade" is when you buy and sell the one particular stock in the same day. If you happen to hold it over night, it is not a day trade. If you sell a stock in a cash account, you can usually buy another stock with that money, but you have to wait T (transaction) day plus 2 more days if you plan to sell that one so the money can clear from the first sale. Your available money to WITHDRAW tells you that have cash available and you can use that money to buy and sell in the same day. You can also have funds "available for trading" but not for withdrawal which means you can buy but you cannot sell yet. I've done it several times and never had an issue. Make sure if you buy with money that has not cleared that you wait 4 days or check your "settled funds" tab, if you must sell that is. I think most of the time they have it cleared now in T plus 1, though.