If you are entering the world of day trading on the American market, you must know this rule. In fact, the PDT rule limits operations in the same session for accounts below a certain threshold.
The threshold for a beginner can be impossible because there are a series of phenomenon you also need to learn, from functions of PTD to options vs. CFD.
So, how to trade CFD without PDT rule? This article will let you know with necessary details.
Let’s start, shall we?
Do not worry. There is a solution, in reality, more than one. Some of them are impractical for technical reasons, and some are feasible.
What Is The PDT Rule In Day Trading?
PDT stands for Pattern Day Trader.
The PDT rule is a regulation established in 2001 by the FINRA (Financial industry regulatory authority) and the American SEC. The aim is to limit intraday operations for accounts with equity of less than $ 25,000.
A day trader using a broker with a margin account below the established threshold can place a maximum of 3 trades every five days (1 opening + 1 closing is considered per trade).
Let’s take an example:
Our day trader Jason has $ 5,000 in his account with a broker, buys 100 Nike shares on Monday at 10:30 am. He then sells the same 100 shares at 12:00.
Jason has made a trade and will make a maximum of 2 more until the following Monday.
Suppose Jason does the same-day trading operation on Tuesday and Wednesday. He will have to wait until the following Monday to make a new operation. Otherwise, the account will be blocked. This is the PDT rule.
How to Avoid the PDT Rule?
I fully understand that $ 25,000 is not a small amount, especially for a novice day trader. So, you will need a way to get around the PDT rule.
Cash Account
One of the best ways to avoid the PDT rules is by opening a cash account. It is safer than the other options, such as offshore trading (which we discussed below).
In a cash account, there is no limit to trade. Instead, you keep counts of the total funds available.
Again, we must remind you that opening a cash account can restrict your account by the (T+2) policy. This policy states that you cannot sell security assets with a cash account.
Pros:
- No limitation on weekly trading.
- Easy to operate.
Cons:
- However, the funds take 24hours to settle.
Offshore trading
Some American-based brokers have opened branches in the nearby Bahamas, completely legally circumventing the problem. They do it to get around the problem and open up to a wider audience of day traders.
Pros:
- More trading scopes.
- You don’t need a minimum 25k balance.
Cons:
- Have to pay commissions to the brokers.
Future trading
Future trading refers to the contract where the trader decides to buy or sell assets at a fixed date and time soon.
Unlike other day tradings, there are no restrictions or rules of PDT in this trading. That means there are no restraints on how much trading you can do in a week. It all depends on the margin. All you need is a faith deposit that will allow you to buy or sell assets in the future.
You can even open an account for just $ 400$.
Pros:
- No restrictions of PDT.
- Trade as much as you want.
Cons:
- You can’t predict the future changes of price nor control them.
Multiple accounts
Here is an option that may not be the best one but a functional one. You can open more than one account with different brokers. It will allow you to trade more with the PDT rule.
But as we said, this is certainly not the best one. Keeping track of multiple accounts can be stressful.
Pros:
- Allows you to trade as much as you want.
- No tension in breaking the PDT rules.
Cons:
- The more the account, the more stress.
- Have to split the capital among multiple accounts.
Final Thought
So, how to trade CFD without PDT rule? There are several ways to make that happen, but not all the ideas are fruitful, not compatible for everyone. If you need to avoid PDT rules, find one that you are comfortable with. And before choosing one, learn the risk factors as well.
