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Do You Really Understand the PDT Rule?

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There are plenty of rules to consider in the financial world when you first start building a financial portfolio. You’ll need to do your research to learn about what kind of accounts you need to hold, and how you can make your money grow quickly without stepping on any toes. For those who take an active approach to build their money, day trading is a common strategy. 

This kind of buying and selling allows you to move in and out of positions quickly, making cash on the small changes in an asset’s price throughout the day. However, there are rules and regulations that you need to consider when you’re learning how to trade on a daily basis. The PDT rule is one of the better-known rules that many experts and beginners get confused by. If you’re one of the people who doesn’t fully understand how this restriction works, you’re in the right place. 

What Does the PDT Rule Really Mean?

The Pattern Day Trading rule is a restriction in the trading environment implemented by FINRA rules. According to this guideline, a pattern day trader is defined as anyone executing four or more rolling (in 1 day) trades using a margin account. If you are defined as a pattern trader, then you are required to keep at least $25,000 in your account -which is a lot of money. 

Rules on the amount you need to keep in your account when you’re responsible for a certain number of quick-succession trades can cause some discomfort. However, a minimum on the amount of cash you keep handy can also be a positive thing. Additionally, it’s worth noting that the rule doesn’t necessarily stop you getting involved with more than 3 trades in a week. If you hold a stock overnight every night, then you’re not a victim of the rule.

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Remember, as a trader you’ll be using a margin account, and these accounts are limited on intraday trading. Not being able to make four quick succession trades in five days doesn’t restrict you as much as you might think when you’re a beginner. You can still learn how to short stocks and build a decent amount of income as a day trader without exposing yourself to rules like the 25k limit.

What Happens if You Break the Rule?

Breaking the rules in the financial world is rarely a good thing. However, exactly what happens to you if you break this guideline will depend heavily on a lot of things. If you have a particularly forgiving broker, they might allow you to deposit cash to get your account back within the 25k limit. If you don’t have the cash to do this, then you might have some restrictions on your account, such as not allowing you to trade without overnight positions. 

If you’re particularly concerned about the rules regarding pattern day trading, then it might be a good idea to speak to your brokerage, or check out what the policies they have in place look like for this kind of buying, holding, and selling. The more prepared you are from day one, the easier it will be to stay out of trouble.

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