I keep getting flagged as a pattern day trader on TD Ameritrade. My account is under $25K and they're saying I can't make more than 3 day trades in a 5-day rolling period.
I've heard if I switch to a cash account instead of margin, the PDT rules don't apply. Is that actually true? What's the catch?
Yes, PDT rules only apply to margin accounts. Cash accounts are exempt.
BUT you have to wait for cash settlement - T+2 for stocks. So if you buy $5K of stock on Monday, you can't use that $5K again until Wednesday. Makes rapid day trading basically impossible unless you have a lot of cash to rotate.
Correct. The Pattern Day Trading rule (FINRA Rule 4210) specifically applies to margin accounts only.
The rule exists because margin accounts have leverage - you're trading with borrowed money. FINRA wants to ensure traders have sufficient capital ($25K minimum) before they take on that risk with frequent day trading.
Cash accounts don't have this requirement because there's no leverage involved - you can only trade with settled funds you actually have.
So if I have $10K in a cash account, I could theoretically make unlimited day trades, I just have to wait for settlement before reusing the same cash?
Exactly. With $10K you could split it into thirds and rotate. Monday trade with $3,333, Tuesday with another $3,333, Wednesday with the last $3,333. By Thursday your Monday funds are settled and available again.
Also watch out for good faith violations. If you buy stock with unsettled funds and sell it before those funds settle, that's a GFV. Three GFVs in 12 months and your account gets restricted to settled funds only for 90 days.
Adding some regulatory context here:
If you violate PDT rules in a margin account, your broker will typically issue a margin call requiring you to deposit funds to reach $25K within 5 business days, or they'll restrict your account to closing transactions only.
Tax perspective: if you're day trading frequently enough to worry about PDT rules, make sure you understand trader tax status (TTS).
If you qualify for TTS, you can deduct trading expenses, use Section 475 mark-to-market accounting to avoid wash sale rules, and potentially get better tax treatment. But the IRS has strict requirements - substantial trading activity, continuity, frequency, seeking short-term profits.
Most casual day traders don't qualify. You need to be making hundreds or thousands of trades per year.
This is super helpful. So it sounds like cash account is legit for avoiding PDT, but I need to be careful about:
Are there any brokers that are better for cash account day trading? I've heard some are stricter than others about settlement violations.
I've been doing cash account day trading for 2 years. Here's what I've learned:
Fidelity: Pretty lenient, good warnings before you trigger GFVs. Interface shows settled/unsettled clearly.
TD Ameritrade: Similar to Fidelity. ThinkOrSwim platform is great for tracking buying power.
Webull: More aggressive about flagging potential violations. Some people like the mobile app though.
Honestly the broker matters less than your discipline. Set up a spreadsheet to track what cash settles when. I use different "buckets" of cash for each day of the week.
One more thing to be aware of: switching from margin to cash account doesn't happen instantly. Most brokers require:
During that transition period you typically can't trade at all. Plan accordingly.
Also, if you're trading options in a cash account, you'll lose the ability to sell naked options (not that you'd want to with limited capital). Spreads and covered strategies only.
Perfect. I requested the switch to cash account with TD yesterday. Going to try the "bucket" approach that @JoshM_Trades mentioned.
Appreciate all the detailed info, especially the regulatory citations. This makes way more sense now.
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