Today, you’ll learn how to avoid being classified as a day trader.
- Use a cash account
- Open multiple trading accounts
- Understand what is a day trade
- Count the number of day trades in the previous four trading days
- Exit positions after the entry day, if possible
Some people get into trouble because they violate the pattern day trading rule.
Generally, they are banned from making additional trades, if they make four-day trades in the last four days.
Traders will be having problems exiting their losing trades, and they will be losing more money.
People who start trading may probably experience these things. They bought a stock and sold it without realizing that they are making a lot of day trades.
They get suspended, and they do not know what happened.
To avoid being classified as a day trader, people can follow the steps below.
1. Use a cash account
Pattern day trading rule applies only to margin accounts, so traders can open a cash account to avoid PDT.
Most beginners are advised to avoid margin accounts in the beginning.
Most beginners do not know what they are doing, and avoiding leverage trading can also help reduce their losses.
Traders are not labeled as day trader no matter how many day trades they make if they use a cash account.
Unless, they are free riding or trading an unsettled fund. (source)
Regulated brokers can actually freeze their client’s accounts for 90 days if their clients bought securities from unavailable funds.
The effects are devastating because people can lose more money because they cannot open nor exit their trades.
Traders should ask their brokers the number of days the funds will be settled when closing positions.
For example, securities sold will be settled only after three days for some brokers, so traders must wait before they can buy other stocks again.
Unless, they have extra fund, they cannot make another trades again.
2. Open multiple trading accounts
People can actually open multiple trading accounts on different brokers to avoid being classified as a day trader.
They can make two-day trades per broker in the five-day rolling period.
For example, dividing four day trades a week to two brokers and so on.
To have more, they can use multiple brokers.
However, four-day trade a week is recommended for manual a trader, because more would be disastrous to the trading account, unless, one is heavily relying on computers just like the pure Quants.
Most traders can handle only one to two-day trades because they are not trading full-time.
3. Understand what is a day trade
A day trade is
- opening and closing stock positions on the same day
- counted based on the number of entries and which entries were partially or fully closed.
Most people are in trouble because they do not understand fully what is meant by day trade, as per the PDT rule.
For example, anyone who buys 100 shares of Apple today, and then sells 100 shares before the close is a day trade.
Selling only 50 shares of Apple is also considered a day trade.
Selling 50 shares and selling another 50 shares today is only counted as one day trade.
Basically, the PDT rule is more focused on the entries.
The table below shows how day trades are counted, if entries and exits are within theme day:
|Bought 100 shares||Sold 100 Shares||1|
|Bought 100 shares||Sold 50 shares and then sold 20 shares again||1|
|Bought 100 shares and then bought 100 shares again(200 shares)||Sold 100 shares||1|
|Sold 101 shares||2|
Traders can avoid being classified as a day trader if they understand what they are doing.
People should record their trades which must include the number of entries, exits, and the number of shares.
They can actually make three-day trades in a day without even realizing it.
Most of the time, it happens when they panic.
4. Count the number of day trades in the previous four trading days
On the trading day, traders should count their day trades in the previous four trading days to avoid being considered as a day trader.
People are actually allowed to open and close their positions on the same day three times, within five rolling trading days.
They will be suspended if they make four, and some of them will not be allowed to even closing out trades.
To avoid suspensions, most brokers will only allow three-day trades so that their clients can trade again on the next trading day.
The rolling five day period must expire before they can trade.
For some, brokers will suspend their clients account for 90 days for violation of the PDT rule, unless the account balance is more than $25,000.
They must do it, or they run the risk of not being able to close out their positions if needed.
Some traders may already lose 20% of their account, yet they cannot get out of their positions because of the Pattern Day Trading rule.
All they can do is cry because the five-day rolling period has not yet expired.
The losses can increase by up to 50% or more because of the volatility of the stock.
Some people can even lose their trading account.
It is important to count the number of day trades in the last four days to avoid unnecessary surprises.
5. Exit positions only after entry day
To avoid day trade, people should exit only on the next trading day.
Now, this is risky, because people cannot immediately exit their trades.
One can actually open their trades near the end of the close so that they can reduce the risks.
However, sometimes, this technique is not really a day trading strategy, so it is not counted as a day trade.
People can actually exit the next day if they already used two of the three allowed day trades to be safe.
Stock trading is really difficult, and people should avoid making a lot of mistakes.
There is only one rule in trading, “Trading stocks should be avoided at all costs if people do not know what to do.”
However, in reality, it is the opposite, and it is the reason why 95% of traders fail.
Day trading is a dangerous game for beginners because there are too many rules and risks.