January 21, 2025 | Read Online

Don Kaufman here.

The Pattern Day Trader (PDT) rule is a pain in the beep. If you're trading with less than $25,000, you've probably hit this wall before. You're ready to trade, you've got your strategy lined up, but then BAM—your brokerage slaps you with restrictions, leaving you locked out, frustrated, and scratching your head.

Let's break it down. What is the PDT rule, why does it exist, and—most importantly—how can you beat it? Stick with me, and we'll navigate this mess together.

What Is the Pattern Day Trader Rule and Why Does It Exist?

The PDT rule says if you're trading in a margin account and your account balance is under $25,000, you're limited to three day trades in a rolling five-day period.

A day trade, for those of you new to this, is when you open and close the same position on the same trading day.

Why does this rule exist?

Supposedly, it's to protect newer traders from blowing up their accounts with reckless trading.

But let's be honest here—this rule doesn't actually protect anyone. It just limits smaller traders, forcing them to play by rules that don't apply to the big guys.

And guess what? It's all about mitigating the brokerage firm's risk, not yours.

The brokerage says, "We're protecting you," but in reality, they're just covering their beep.

If they were truly looking out for you, they'd want you doing safer trades, like spreads, instead of buying naked calls or puts.

But no, they let you do the riskier stuff while locking you out of smarter strategies. Makes no sense, right?

The Consequences of PDT: Locked Down and Shut Out

Here's how it works: say you're on your third day trade in a week, and you try to place another. Boom—your account gets flagged.

They might send you an email saying you're now in restricted status or even put your account into "closing only" mode. That means you can only close out your positions—you're not allowed to open new ones.

Even worse, if your account was over $25,000 and you dip below that amount, you could get hit with a margin call. Yup, they'll send you an email saying you've got to deposit more money to maintain your trading privileges. It's enough to make you want to scream.

But don't worry—I've got some strategies to help you avoid this nonsense altogether.

How to Beat the PDT Rule: Workarounds and Strategies

1. Open Multiple Smaller Accounts

This one's a no-brainer. If you have $15,000 in trading capital, split it into three separate accounts with $5,000 each. Trade in one account on Monday and Tuesday, another on Wednesday and Thursday, and the third on Friday. Boom—problem solved. You've just bypassed the three-trade limit.

Why does this work? Because the PDT rule applies on a per-account basis. As long as you're spreading your trades across multiple accounts, you're good to go.

2. Trade Futures or Options on Futures

Here's the kicker: futures and options on futures are exempt from the PDT rule. That's right—no restrictions, no limits, no nonsense. You can trade as much as you want, even with a smaller account. Futures products like the /MES (Micro E-mini S&P 500) are a great alternative to stocks or options. Plus, they often require less capital to trade.

But let me give it to you straight—liquidity can be an issue with some futures options, especially in the micros.

You won't get the same tight bid-ask spreads you see in SPY or QQQ options. Still, if PDT restrictions are holding you back, this is a solid workaround.

3. Use Cash-Settled Instruments Like SPX Options

Another trick is trading cash-settled instruments like SPX options. Because these don't involve physical shares, they avoid some of the margin headaches that come with stocks. Here's the beauty of SPX options: if you let them expire, they settle in cash, and you don't have to close them manually. That means fewer trades, which helps you stay under the PDT limit.

For example, if you're trading SPX butterflies, you can let the position expire instead of closing it. That way, you're only logging one trade (the opening trade) instead of two (opening and closing). Strategic? You bet.

4. Switch to a Cash Account
If you're trading stocks or options, consider switching to a cash account. Here's the deal: cash accounts don't let you borrow money (no margin), but they're also not subject to PDT restrictions. The catch? You're limited to the cash you have available, and you'll need to wait for trades to "settle" before reusing the funds. Still, for smaller traders, this can be a game-changer.

5. Focus on Swing Trading Instead of Day Trading

I know, I know—day trading is exciting. But if PDT is killing your vibe, consider switching to swing trading. Hold positions for a few days instead of closing them out the same day. This way, you avoid the day trade count altogether. It's a simple shift, but it can make a huge difference in your trading freedom.

Take Control of Your Trading

The PDT rule may be frustrating, but it's not the end of the road. With the strategies we've covered—splitting accounts, trading futures, or using cash-settled instruments—you can sidestep these restrictions and trade smarter. Remember, brokerage firms are looking out for themselves, not you.

It's up to you to take control, work around the rules, and level up your game.

The PDT rule is a hurdle, not a wall. Use these tips to keep trading on your terms.

Now, if you're struggling to find three trades per week, I've got something for you.

Click here to get my top three trade ideas each week.

To your success,

Don Kafuman

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