What's up, everybody? All right? So today we're going to talk about trading terminology and the term of the day is the PDT rule also known as the Pattern day trader Rule. Now, whether or not you realize it, every single day trader is affected by this rule, including myself. So if you're a beginner trader, you need to understand what the PDT rule is and how it works. Now as a beginner trader, I Personally didn't know what it was and as a result I violated the rule and I got flagged by my broker and it was a problem.

I Want to help you avoid having to go through that same experience that same frustration. So that means you need to understand how the rule works, what the thresholds are, what the requirements are, what it means to break it, and what happens when you break it. Now, when we talk about the PDT rule, we're also going to talk about a couple of other terms and we're going to start by just talking about the definition of day trading. You guys probably all realize this, so we'll just kind of breeze through these.

But day trading is defined as buying and selling a stock in the same day whether you buy pre market, during market hours or after hours. If you buy and sell in the same day, you have executed a day trade and therefore it's a trade that counts towards this PDT requirement and the PDT threshold. If your swing trading, you're holding positions overnight, the PDT rule doesn't apply to you. All right? So some traders with smaller accounts and you'll understand why in a moment we'll swing trade buying stocks you know at the end of the day and then selling them in the morning because they know they can do that without getting flagged.

Of course, there's a lot of risk with holding stocks overnight and I prefer to be a day trader, but that means I need to work within the confines of the rule. Now, whenever you open a brokerage account, you have to declare yourself as either being a professional trader or a non-professional trader. So who draws the line? I Kind of consider myself a professional trader I've made $200,000 in the last 12 months and I do this full-time But in the eyes of my broker, I'm a non pro trader. Why is that? Well, professional traders are traders who have a license.

They've been licensed by a broker either with their Series 6, Series, 7, Series, 63, 65, or 66 and means they're either a licensed stockbroker or a registered financial adviser or something like that. If you are one, you know that you are one, right? I Don't have to tell you that you have your license and if you're not one, then now you know that you would put down nonprofessional under all of those questions and boxes. All right. So when you open an account, they want to ask you if you're professional trader for one very specific reason and why I See and Nasdaq charge professional traders a higher fee for accessing market data.

All right. So retail traders this is. We get a discount. We get a reduced fee, which is awesome.

All right. So when you're opening your account, they need to know how much to charge you. and that's why they're asking you that question. All right now, day traders are not required to be licensed.

There's no rule that says we have to be licensed as long as we're trading our own money. That's not a requirement. Now, once you open your account, you have two types of accounts that you can open. One is a cash account and the other is a margin account.

A cash account is exactly as it sounds. You put in ten thousand dollars and that's the balance of your account every time you take a trade. If you buy a stock for three thousand dollars and then sell it, you have to wait three days before that. Three thousand dollars is available to trade with again.

So that means your effective, tradable balance is only seven thousand dollars. This is the reality of it's. almost like waiting for a check to clear. It's just the reality of trading with a cash account.

You've got to wait for the settlement period. So if you have a small account, it really limits the amount that you can trade because you continually have to wait for trades to settle. You can't buy a stock for $10,000 and then sell it the same day and go buy another stock for $10,000 Your money is going to be completely tied up in that position. You know now for the next three days.

So margin accounts are the solution to that problem. A margin account requires a margin agreement, and what it means is that your broker is basically giving you a line of credit. So they're saying, look, you know what this is going to take three days to settle. But don't worry I know you're good for it.

I'm going to go ahead and let you keep trading. So you take the trade for $10,000 You sell it. That trade has to wait three days to settle, But you can go ahead and buy another trade for $10,000 In fact, you can do it ten times and trade with a hundred thousand dollars in one day. All right.

But when you have a margin account, you fall under the PDT rules. So the PDT rule is specifically around trading on margin, and we're going to talk more about that in a second. So you understand why they created this rule. But trading on margin is what allows day traders to take up to ten fifteen twenty trades a day.

and in a single day, we could trade a million dollars worth of stock, even if we only had you know, a thirty thousand dollar account balance. So that allows traders to leverage their money to potentially generate some really large gains. Although of course, you also have the potential to generate some large losses. Now, when you get a margin account, you're also given leverage.

Leverage is they take the current balance of your account if you put in thirty thousand dollars and they multiply it by four for intraday trading which would give you a hundred twenty thousand dollars of cash that you could trade with. And at night they multiply it by two which would give you sixty thousand dollars. So if you put in a hundred thousand, you've got four hundred thousand dollars that you can de trade with. And if you put in a fifty thousand dollars, you have two hundred thousand dollars.

So that's for day trading. It's the current cash balance multiplied by four. This is, you know, kind of an interesting thing because it allows you to be extremely aggressive. You can trade on borrowed money and so there are traders who have done this.

and then when you lose borrowed money, you now owe that back to your broker. So you have to be very, very careful about trading with leverage and trading on borrowed money because the risk is that you can lose money that you don't even have. All right now, because trading on margin carries risk. FINRA and the SEC have created the Pattern Day Trader rule and this is a way of flagging there types of traders.

and if you are considered a day trader a pattern day trader you will be required to maintain a minimum account balance of $25,000 All right. So the PDT rule says if you trade more than three times in a five day period, then you are going to be flagged as a pattern day trader. So a broker needs to flag you as a pattern day trader and they need to make sure all accounts flagged as being pattern day traders maintain a minimum of a twenty five thousand dollar balance. Now, this is obviously going to be hard for a lot of traders, but if you have less than $25,000 in your account, you are limited to three day trades every five days.

And that's that's just the rule. It's black and white if you're using a margin account. If you're using a cash account, you could day trade more, but you would have to wait three days for every trade to settle. Alternatively, you could trade options which settle overnight.

so some traders with small accounts in the five to ten thousand dollar range will either swing trade or they will trade options. Because of the shorter settlement period, other traders will open accounts internationally that don't that don't enforce the PDT rule and ensure trader is one of the accounts that I know a lot of traders use. It's located in the Bahamas and they don't enforce the PDT rule so you can go in there and you can open a margin account with a thousand dollars and you can buy and sell and buy and sell a hundred times a day. So that's something that a lot raters have done.

I've done it I've had an account there I'll probably have an account there again shortly as I test out trading with a small account so you know that's an option. but you obviously have the slightly increased risk of putting your money abroad and you know, offshore and not knowing. you know that it has the same level of security as a domestic broker. So I would never put my life savings in an international trading account whether it was sure, trade or somewhere else.

But when I put $1,000 they there and see what I could do with it. Yes, I would and I have before and when I did that I took a thousand dollars and day traded it up to an eighty $600 balance in one month that be over ninety thousand dollars a year from one thousand dollar starting balance. So that's the potential of trading with a margin account with a small account and using leverage. So you know to be a successful trader just sort of as a as a tangent here, to be a successful trader does not require you to have a lot of money.

It requires you really just to have skill to have a strategy. And so the strategy that I was trading during that month was my momentum day trading strategy. buying stocks that were squeezing up, getting in as early as I could and riding the momentum so you can learn more about that in some of my other videos. But when it comes to the PDT rule, let's talk a little bit about the history behind this rule.

So as you know, if you execute more than three trades in a five-day period, Google get flagged as a pattern day trader requiring you to have a minimum of $25,000 Now if you get flagged as a day trader, you can have one free pass your bookie you can say to your broker look, I'm sorry it was a mistake I didn't know about it and they can give you one free pass but only one. If you do it a second time, you will get flagged and your account will get frozen. Meaning you can't execute new trades unless you increase your account balance to more than $25,000 If you don't have the money, then essentially you're probably going to end up closing that account and going to open your account, a new account at a different firm and hope that you don't get flagged there. you know, and don't make the same mistake twice.

Or maybe you go and open an account with sure trader. But to give you some history behind the PDT rule. as many of you know, day trading became pretty popular in the late 90s you know, with the the the.com bubble and all of that stuff and it really peaked in 1999 and in 2000 the The Tech stocks all the dot-com stocks. There were just crazy moves.

The market was extremely volatile, there were huge short squeezes, and you know this represented huge opportunities. Traders would get into these stocks, the IPOs dot-com stocks and they would make you know a hundred percent overnight. I Mean it was. It was crazy how much people were making and so retail traders.

you know, they followed their dreams, they quit their jobs, they just put all their money into the market. They were trading with borrowed money, and then as many of you know, we had the bubble burst, right? We had the the collapse and Nasdaq collapse 78% off its highs in the mid 2000s. So when that happened, a lot of retail traders got crushed. they got completely destroyed.

and so as a result of those losses, the SEC wanted to implement some rules really to help prevent unsophisticated investors or traders from making those mistakes again. All right. So SEC worked with NYSC and Nasdaq and they created the pattern Day Trader rule and they said anyone who executes to more than three trades in a five-day period is a day trader and they need a $25,000 minimum balance and that would help prevent traders with small accounts being speculative from trading with borrowed money and then ending up losing their shirt. So you know this is this is a good thing I suppose in theory, but as it turns out, having $25,000 does not make you any more qualified to trade stocks.

And I know this. Having worked with thousands of students over the you know the last several years, a lot of students come in with $25,000 accounts. and because they have four to one margin, they've got $100,000 in buying power. and we've seen traders come into the market and blow up their entire account, not only lose the $25,000 they initially put in, but now have a margin call and be in debt to their broker $50,000 $60,000 or even the full $75,000 And this is especially true for traders who are shorting stocks.

So let's just look for a second here at D Ry S. Now let's just imagine, let's just imagine for example, that you got in Dr. Ys and I'm going to pull up the chart here that you got in this and you shorted it at. Let's say, you shorted the Ry S at $5 with 10,000 shares.

All right. So we've got $5 right around here. So you sure 10,000 shares at $5 When it goes up to $6 you're down $10,000 All right. So that's not a good trade.

You're a little bummed out. Goes up to 674, You're down $17,000 All right. Pulls back a little bit. consolidates, Whatever it goes up here through 7.

you're down. $20,000 goes up to eight. Thirty thousand nine, forty thousand ten dollars. You're down.

Fifty thousand dollars. All right. Pulls back a little bit. You're thinking I'll it's not too bad.

Maybe it'll come back. Now, up to eleven, you're down Sixty thousand Twelve, Thirteen, Fourteen fifteen, you're down a hundred thousand dollars. Now Imagine if you had a fifty thousand dollar account and you had two hundred thousand dollars in buying power. Well, maybe you could hold through this pullback.

Well, next day it goes to eighteen dollars and let's just scale this a little bit. The next day it goes 24 and then it goes to 32 and then it goes to 45 and then it goes to 56 and then 68 and then all the way up. This is absolutely insane to a hundred and twenty dollars. I Mean if you can wrap your mind around that, this right here is a potential catastrophe.

You could lose hundreds of thousands of dollars, even millions of dollars on this type of trade. Now, eventually this stock did come all the way back down, came all the way back down to eleven dollars. almost in just as quickly as it went back up. But if you couldn't afford to hold through that squeeze and you got called out of the trade by your broker, if you if you hit your max loss, your broker will close out your account and and you're done.

So let's say you know there I'm sure there's someone who hit their max loss like right here. If only they could have held through a little bit further. But how do you know when the top is right to hell? you don't hold down a million dollars just to come back to break even? That's not risk management. And so the PDT rule in a lot of ways is an effort to try to prevent you know, unskilled traders from making really big mistakes.

But as I said, the amount of money you have does not equal education. So the most important thing for all traders to know is that being successful is not about having money, it's about having training. It's about having skills about learning a strategy. And this is a strategy that can last you a lifetime.

So even today, the PDT rule is something that I'm affected by now. with my account balance being above $25,000 I haven't have to worry about it, but I am flagged as being a pattern day trader. All right. So if you're a new trader, you've got a smaller account and this is something that you're going to have to think about so we jump back in here.

Something you'll hear about a little bit is the round trip. All right. So a round trip in reference to the PDT rule is when you buy and sell in the same day. All right.

So if you buy 10,000 shares today and you sell 10 of those shares today, you've made a round trip on 10 of those shares. Yes, you're still holding. you know, nine hundred and ninety. but you still execute it to day trade.

All right. So if you buy a thousand shares today and you sell a thousand tomorrow, then get it an execute day trade. You're not. It's not going to count against your max of three if you're under the PDT rule.

And as I said, the penalty for breaking the PDT rule. You get one free pass, one get a jail free card, and your broker give you a warning. and then if you break the rule a second time, your account will be frozen for 90 days and you can't trade unless you get the balance above $25,000 But as soon as you get the balance above $25,000 you can trade before the 90 days are up. So the solution to the PDT rule well, swing trading is certainly one.

Trading options is another The option that the choice that for me always made the most sense was I wanted to day trade. So I just went and found a broker where I could do it and that was looking for brokers that are offshore. you know our international brokers. If you're already international, well that makes things pretty easy for a U.s.

resident. though it doesn't mean we have to go look for you know place to trade outside the United States which certainly not ideal, but we've got to work within the system and this is the system as it stands right now. the PDT rule is here. It's been here for a long time.

I Don't see it going anywhere anytime soon. So if you are below $25,000 you don't have a lot of choices and you know there are some traders who will opt to trade at a Prop firm. Now Prop Firm will ask you to get a license. you have to get licensed to trade.

They're kind of like trading at a hedge fund, so going through the process of studying, getting licensed and then oftentimes you're going to have a profit split where they share some of the profits. You're also going to have a lot of restrictions on your account because you're trading the firm's capital. You know that's going to be a less than ideal scenario. Prop Firms that allow you to trade without getting licensed are usually kind of like unregulated and we've heard stories about people putting their money into those kind of prop firms and then them closing their doors and not people.

don't see that money again. So definitely we've never had a proper man we would you know stand behind. So your options are somewhat limited if you're below 25,000 I was at one point and I trade with sure trader. For the most part when I was getting started I was able to maintain that twenty five thousand dollar minimum and that's why when I trade and shirt my shirt trader account now I'm doing it not out of necessity but out of just you know for the sake of it, for the sake of practicing trading with a small account.

because I enjoy doing it and I like showing our students the potential what you can potentially make when you trade with a small account so you know for me to turn a thousand dollars into eighty six hundred dollars. That was because I was able to get around the PDT rule and because I was able to actively day trade now with my larger account once I'm trading above twenty five thousand I could certainly be pretty aggressive, but as a beginner trader trading with that size account I did some real risky stuff. You know there were times where I took positions that were way too big. you know I have a $30,000 account and have a hundred ten thousand dollars worth of stock.

I mean that's a crazy amount. Like you know, 40,000 shares of a $2 stock or something like that. And you know I mean that we see how fast some of these cheap stocks move we can look. We saw Dr.

Ys over the last few days Ec today. The stock ran from a dollar forty to almost $3.00 That's a 100% intraday move. Granted, with 40,000 shares could have made $40,000 but the same time if you were sure he could lost that much or if you know in one of these candles that suddenly drops, you could lose thousands of dollars. So everyone that's coming into the market you know we're all coming and looking for the same thing.

We're looking for financial freedom. We're looking for the opportunity to make a full-time living working from home and that's really the dream. But we have to work within the regulations and you know, kind of make sure that we understand the rules and that we trade safe and we trade smart. So I hope this video has helped you understand the PDT rule, how it's going to affect you and what you need to do to be mindful of it and to avoid getting flagged by your broker.

So if you have any questions, please feel free to leave comments below I'll definitely answer them or you can email Ross at where your trading calm. All right Thanks guys! Let's be honest, if you made it this far, you must have really enjoyed that video. So what's stopping you? Subscribe right here and get email alerts any time I upload new content. Until then, happy surfing.