Ways to avoid being labeled a pattern day trader

Question

Other than the obvious answer of "don't day trade" what ways can I avoid being labeled a pattern day trader.

I've read the rules for when the label is triggered but I'm wondering about some real experiences and interpretation of the rule because it's got a lot of conditions.

For example will I be labeled a day trader if:

• If I do three day trades every week in a margin account but never more than 3 in a week with no other trading activity on the account.

• I do 10 day trades in 2 days in a non-margin.

• I have 10 day trades in 5 days but in the same time I've closed 100 open positions that were open prior and open 100 new positions that remain open after. (day trades < 6% of volume) In a margin account? Not in a margin account?

There are a lot of variations, just trying to get an idea as to what the limits are and how to avoid them.

Answer 1

FINRA Description of Day Trading rules

The rules adopt a new term "pattern day trader," which includes any margin customer that day trades (buys then sells or sells short then buys the same security on the same day) four or more times in five business days, provided the number of day trades are more than six percent of the customer's total trading activity for that same five-day period.

So, there's several ways to avoid being labeled a pattern day trader:

1. Don't make four day trades during any period of 5 business days. Whether these 5 business days are in the same week doesn't matter. 2 day trades on July 1, and 2 on July 8 will trigger the designation (since July 4th was a holiday)
2. Don't have a margin account. But if you do day trades in this account, you need to make very sure you have the actual cash to cover it before you buy, otherwise you can run into the Free-riding rules. Trying to profit from the small swings of day-trading with no leverage would be very tough.
3. Have the number of day-trades (NOT the volume of the trades) be less than 6 percent of your total trades for that 5-business day period. I wouldn't recommend trying to generate trades just for this purpose, because of the cost and the increased risk.
4. Not care about the pattern day-trading label, because you have $25K worth of equity in your account.

Answer 2

Sorry but you already provided the answer to your own question. The simple answer is to 'not day trade' but hold things for a longer period and don't trade a large number of different stocks every week.

Seriously, have a look at the rules and see what it implies.. an average of 20 buys and sells of longer term positions PER DAY is a pretty fair bit of trading, that's really churning through the positions compared to someone who might establish positions with say 25 well picked stocks and might change even 5 of those a week to a different stock. Or even a larger number of stocks but seeking to hold them for over a year so you get taxed at the long term cap gains rate.

If you want to day trade, be prepared to be labeled as such and deal with your broker on that basis. Not like they will hate you given all the fees you are likely to rack up. And the government will love you also, since you'll be paying short term gains taxes. (and trust me, us bogelheads appreciate the liquidity the speculative and short term folks bring to the market.)

In terms of how it would impact you, Expect to be required to have a fairly substantial balance ($25K) if you are maintaining a margin account. I'd suggest reading this thread My account's been labeled as "day trader" and I got a big margin call. What should I do? What trades can I place in the blocked period?