I get this asked a lot.. how to handle this inconvenience.
Story goes, someone walked into a brokerage firm and blasted the staff away in frustration after losing his shirt on the market. For safety’s sake – in protection of the traders from themselves – the SEC instituted the $25k rule, which says you can only trade in and out up to three times in a five day period if you have less than $25,000 in your account. This pattern day trading rule is designed to curb the ‘gambling’ effect and help traders learn to trade first, while preserving their capital. Of course, it’s often just a matter of time anyway that traders blow their accounts up.
There are ways around it, however, if you do insist.
Open a cash account. Brokerages do not like to do this because they make most of their money on lending traders money to buy stocks in the form of margins. As a ‘cash account’ holder, you will not have margin capabilities. However, many brokerages will open such accounts, which essentially says you can trade all you want, provided you have the cash. You can only trade your profits, however, when your trade ‘settles’, which is in 3 days. So, if you trade $1,000, make $100, you can continue trading your initial $1,000 but you have to wait for 3 days to trade $1,100. If you break this rule, you will likely have your account frozen for 90 days, without warning. Not good. I am living proof of such a frozen account… done to me with Options House some years ago.
Another way around this is to open several small accounts. Do your 3 trades, then move on to the next account with a different brokerage. Another 3 trades, go on to the third account. By the time you’re done there, simply swing back to your first account and start over again. When cumulatively you have over $25k, amalgamate them into your favorite brokerage and you’re free to trade as much as you want.
This rule pertains to U.S. accounts only, so those living beyond the borders don’t have to be concerned.
Also, if you have the cash, you may simply put the required capital in your account. I believe most brokerages do pay interest on your funds, so it might be just as easy to keep it in your brokerage account. That would be the simplest resolution.
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Hugh W. Grossman, Head Trader at Day Trade SPY.
Hugh Grossman is the founder and Head Trader at DayTradeSPY and uses his vast experience to teach his methods to make consistent daily gains trading SPY options. Join Hugh in his interactive Trading Room to see how he regularly pulls in the profits!
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