Trading with an Account Balance Under $25,000

Many, if not most, of our traders have less than $25,000 in their accounts.

That poses a problem as day traders. Financial Industry Regulatory Authority, (FINRA) is a private American corporation that acts as a self-regulatory body that governs member brokerages and exchange markets. Its mission is to protect investors by ensuring the U.S. securities industry operates fairly and honestly. FINRA is ultimately regulated by the United States Securities and Exchange Commission.

As an attempt to protect investors by ensuring they have sufficient capital to manage the risks associated with day trading, FINRA established the Pattern Day Trader Rule (PDT). In short, you are required to maintain a minimum equity of $25,000 in your margin account on any day that you trade. This could be in the form of cash and eligible securities. If you do not meet this requirement, you are restricted to no more than three round trip trades in a five business day period. Failure to meet compliance can lead to restrictions on trading, including being limited to closing only existing positions. There is more to this rule, which you can learn on the FINRA website, but the essence is strict restrictions to your account. I’ve been there a long time ago, and trust me when I say, it is very painful.

As we day traders have an insatiable addiction for the need to engage on a daily basis, there are ways to avoid this PDT situation. First of all, it only applies to U.S. accounts. If you are, for example, trading on a Canadian account, you need not be concerned. If you are a Canadian trading on a U.S. account, you fall under the auspices of this rule.

The easiest way to trade daily is to use a cash account. This essentially enables you to trade as much as you want as long as you have the capital in your cash account to cover your trades. The main thing to keep in mind is that you cannot trade your profits until they have “settled,” usually the following day. Until several years ago, this was a three-day turnaround, but the electronic age brought that to a next day settlement. Even with this, however, be aware that we’re talking about banking days. There are some banking holidays that are not stock market holidays; therefore, be cognizant that you do not overstep your trading requirements.

If you do get slapped with the penalty, being a possible 90-day suspension, one go-around is to simply open another account. It could even be opened with the same firm, but you may want to confirm that. Then, move your funds from your restricted account to your newly opened account, but do be careful you comply with the rules.

I also know of traders who have several trading accounts with different brokerages. They trade three times in one account, then move to the next and the next. By the time they exhaust the third, they return to the first. Once they accumulate $25,000 in the three accounts, they consolidate everything into their favorite brokerage.

The Pattern Day Trade Rule is not without merit. It was inspired by a surge in day trading activity following the dot-com bubble of the late 1990’s. Many inexperienced traders lost a substantial amount on the perceived ease of making quick profits from internet-related stocks. This protection encourages a more cautious approach to trading.

These are just some of the things we address in our programs. You will gain insights into our products and services through our free 8 p.m., ET, Sunday night Intro to Trading/Week in Review.

Our Inner Circle brings traders together from all levels of experience with our Morning Market Analysis, daily follow-up reports and Wednesday night Meetups. Let us do the heavy lifting, so you don’t have to.

Not much time in the mornings? Let us pick your trades. Our algo-based DTS Signal triggers your ideal time to enter for a 5% daily gain, three to five times a week. It’s easy, even on your cell phone.

If you prefer, our hand-selected Pick of the Day is designed to be bought at market open. Earn 6% a trade and more, for those familiar with our strategies.

Ready to ramp up your trading to the next level? Novice or experienced, join our world-renowned Trading Room, mornings, 9:20 to 10:30 a.m., ET.  This live-streaming is hosted by veteran Eagle Financial Publication traders Hugh Grossman and Jon Johnson, combining over 45 years of experience.

Create great trades,

Hugh