Pattern day trading (PDT) only applies to traders in the United States. It happens when a trader executes over three day trades within a five business/trading day timeframe. However, a lot of people fail to realize that this only applies to margin accounts, which you don’t have to adopt. You could use a cash account that allows you to pay for securities in full, whereas in a margin account, you could borrow the funds. The settlement period is two days (T2), which means that you can’t use the funds (after a sale) until two days later. However, there is a way to bypass having to wait two days to trade again.
How to go about it . . .
Since you know it takes two days for the funds to be available again for trading, you could do this:
- Monday – Divide your funds into two parts. We’ll use $2,000 in our instance…to day trade for Monday, you’re focused on the $1k from the $2k.
- Since you now have $1k to day-trade with, divide it by the number of times you’d like to day-trade. That is, if you want to trade two times, you’d divide it by two, after which you’d be left with $500 ($1k/2) each for the two trades. Even if you’d prefer to trade four times, just divide that $1k (half of your total funds…our example is $2,000) by four–leaving you with $250 for each day trade.
- We know that the funds/proceeds after each trade don’t become available until two days later, and this is why we divided the initial balance just so we could have funds for the next day.
- Tuesday – So now it’s day two, and we have to day-trade again…but not to worry, as we have the other $1,000 from prior day’s split. Do the same thing we did on Monday and split your funds in however many parts and trade with said allocated parts.
- Wednesday – Funds from Monday’s trades are now available again . . .unless you’re holding a swing.
Remember, divide the total available balance first, after which you should use that half for the entire day. Break it down into how many times you’d like to trade (day trade or swing) and use the corresponding funds ($1000/2 = $500…so trade twice that day using $500 at a time). You may contact your broker to change your account to cash if it’s currently on margin. Once you get to $25k, you may switch back to a margin account. But know that you’re not limited to any type of account.