Day trading on Robinhood is a “pioneer of Commission-free investment” and it looks like a perfect solution for all your trading needs.
It sounds enticing. Isn’t it?
But you know there are lot more things you must consider before diving into the pool of trading.
And one of the things that you must be aware of is the rules governing day trading.
You might know about the restrictions on trading, especially for traders with a small account. And here comes the biggest buzz “Pattern Day Trading” or PDT. This is introduced by the Financial Industry Regulatory Authority (FINRA).
Pattern day trading comes under a rule that was made to protect the investors from spending too much. So that they don’t lose their hard-earned money in an investment with wrong decisions.
This rule helps to monitor the day trade of a trader so that they can comply with all the rules and regulations. This rule enables the traders to three days trade over five business days with less than $25K in their account.
This rule is made to protect the new investors (old as well) who have limited funds. It saves them from taking on too much market risk.
So what happens if a trader places more than three days of trade within five business trading days?
If it happens, Robinhood flagged you a “Pattern Day Trader” or PDT. Once you are flagged as a pattern day your account will be penalized for 90 days. You need to play the safe day trade to avoid the penalty.
In five business trading days, you are limited to three-day trades. If in case you trade for the fourth day, you will be flagged as a pattern day trader.
If you want to trade for the following day, you must ensure that at the end of the day you have $25000 in your account. This is the minimum equity requirement. If you fail to maintain this minimum requirement of $25000 you will be flagged as a pattern day trader.
To avoid this restriction you must close your trading day at or above $25000. No matter if your account fluctuates the whole day but at the time of closing, you must meet the limit of $25000.
And always remember one thing, you cannot use the cryptocurrency to satisfy the limit of $25000. You can use only cash, stocks, and options trading in your account.
Let’s understand the safe trade day with examples.
- If you buy 500 shares of a company “A” at 10 A.M. and sell at 12 P.M. then it is considered a “Day Trade”.
- If you buy 500 shares of a company “A” at 10 A.M. and sell 300 shares at 12 P.M. and carry the remaining 200 shares for the next day, then it is also considered as a day trade. Because you didn’t exit from all of your shares.
- If you buy 500 shares of a company “A” at 10 A.M. and again buy 300 shares at 10 A.M. and then again buy 200 shares at 11 A.M. and sell all the 1000 shares at 2.30 P.M. then it is considered a 3-day trade.
- If you buy 500 shares of a company “A” at 11 A.M. on 10 January and sell these 500 shares at 12 P.M. on 11 January, then it is not considered a day trade.
I think now you can understand better that restrictions will be levied on you if your account goes below $25000. If you want to avoid the restrictions you must not go below that limit.
But if in case you go below that limit and are flagged as a pattern day trader then what should be done in that case. Let’s understand.
There are two ways to remove the Pattern Day Trader status from your account.
The first and foremost option available for you is to deposit funds into your margin account. You need to maintain the account value greater than $25000. Pick these options as soon as possible.
If you can successfully deposit the amount and meet the balance criteria of $25000 before the market closing, you might save yourself from getting penalized.
The second option is waiting. You need to wait for 90 days before initiating new positions. And you can ask for a pattern day reset on behalf of your broker. This is the best option because FINRA allows the brokers to remove the pattern day trader flag from their customer’s accounts every 180 days.
Once the penalty is removed you will be enabled for day trading at the same pace (three-day tradings over five business days).
- Open the support section and access the message section through the client portal.
2. Choose the pattern day trader request and the PDT tool will be launched. Now your account will be checked to know whether you are eligible for a PDT reset or not.
3. Acknowledge consent declaration about your understanding.
4. Click on send reset request button and submit the PDT request.
5. Robinhood then reviews your PDT request and it takes around 1-2 working days for further process.
Yes, you can disable it, but if you place three-day trade in five business days you will get the notification if you are short on $25000. Then the only choice you have is to cancel the trade otherwise you will be flagged as a pattern day trader.
Yes, if you have a cash account on Robinhood, you can trade without any restrictions. Traders with Robinhood Standard or Robinhood Gold account have to bear the restrictions.
So, whenever you heard about the commission-free trade platform, Robinhood is the first name that comes to your mind.
Yes, you can trade commission-free here, but the most important thing is to maintain your account at $25000 to save yourself from a tag of the pattern day trader. Keep your trading speed at a manageable pace. And if in case you are flagged as a pattern day trader, just go through the tips to remove yourself from a pattern day trader tag, and examples of day trading we have precisely given in this blog.