The PDT rule was put in place to prevent small traders from becoming gamblers with their money and risking losing it all. If you remove the rule, you will have small traders day trading 10 and 20 times a day, in and out, in and out on a whim -- If this is not gambling then I don't know what is. On the other hand, the PDT rule prevents many small traders from being able to take advantage of very good day trade leads on a daily basis because you're allowed 3 day trades and you're done. This means that, for instance, you make one round trip day trade on Monday then another on Tuesday and finally another on Wednesday. Well what about Thursday and Friday? What if there were a huge day trade lead that will occur on Thursday that would net you a whole month's worth of profits and this lead is your biggest daytrade lead so far but you can't take advantage of it because you already expensed your trading quota for the week? How is that fair? This rule is, in this sense, causing people to lose money because they are restricted from making it. In conclusion, I agree that there should be a PDT rule to keep small trader from gambling their money by jump in and out and in again and out again in a single day. But, 3 day trades a week? Give Me A Break! My proposal is that the PDT rule should be revised to allow the small account trader to trade 5 day trades a week or 1 day trade for each day of the week -- this way they won't be forced to miss that really big opportunity that may come on a day during the week that they have been restricted from trading because they already used up their 3-daytrade quota. In other words, at least give them the chance to trade everyday instead of forcing them to sit on their thumbs for 2 days out of the week while everybodyelse is making money.
That's a start. But then you'll have those claiming that some would think they could quit their jobs and get rich with a service or system that allegedly would give them that one big day trade everyday. The rule as is, is also a disincentive for that sort of thinking. If one wants to really be a day trader, and make a living doing it, they should simply choose to trade things that have little to no barriers of entry in their chosen profession.
Help me out here, Dmanx. A little history. I have not traded options or currency up to this point, and I'm only slightly aware of the risk they create when trading. I plan on learning options in the future. I believe the YM to be the lowest risk futures instrument (to my knowledge). I have a well established set of rules. Because of market volatility, the smallest increment of the YM (1 contract) exceeded, and continues to exceed my risk. I can only control that risk by simply not trading that contract. I can control my risk trading stocks and etf's, however, but I am limited by the PDT with my current funding. And here's how. I must trade a larger time frame to avoid triggering the rule too many times. That also means a bigger stop, which translates to smaller size, which translates to smaller profits (and losses of course)... and a lot more sitting around and waiting. I believe the PDT is all about risk, and as most gov actions, SEC or otherwise, misguided and miscalculated. From my current perspective, it robs me of opportunity...providing I don't change my rules...and we all know what happens when we violate our rules. What instrument do you recommend for intraday trading, given what I've just described?
My whole argument is more against the rule's implementation rather than the idea of trying to limit risk in small account traders. While I understand the intent of the rule (and it's difficult to put forth a solid argument against the intent other than personal freedom), its implementation is simply irrational. As I pointed out before, if you want to limit losses in small account traders, then limit the losses in their account, not their day trades. That is certainly a better implementation that fulfills the same intent. In the history of mankind, rules have persisted for often no logical reason.
Hence the hypocrisy in the rule. There are no rules limiting me how many times I can go to the horse track or Vegas and gamble my life savings away. Second, I can just as easily lose 30K jumping in and out 20 times a day as I can 5K. I think a loss limit per day or week is better than a day trade limit. Thus, the a trader who goes on a losing streak of a certain size is forced to take a "time-out" from trading for a specified period of time, while the winning trader is allowed to continue. A loss limit helps teach risk management. A day trade limit doesn't.
Not a bad idea either. Perhaps 3 losses in a 5 day period of a certain percentage of the total account value for each trade would cause you to sit out for the next 2 days or something like that. hmmmm.....
Oh REALLY http://www.sec.gov/answers/daytrading.htm The SEC does not seem to agree. Why don't you ask them?
Risk is not so much a mere function of volatility as it is about relative lack of liquidity(both go going long or in particular going short), susceptibility to event shock (news in particular which only effects the stock), uneven rules (like an uptick rule to short), lack of transparency (NBBO isn't the sum total of BBOs) and types of participants (market makers, specialists, block traders, etc.). Given that set of criteria, index futures in general can be less risky than stocks. One central exchange that merely matches orders on a FIFO basis. Better transparency. Exceptional liquidity (ES [eMini S&P 500] in particular, simply enter a sell to go short - no need to obtain from an inventory, and all participants are on the same footing. Event shock has to be one that affects the entire economy or broad sector of it as opposed to a mere single stock news. Slippage is nominal if at all during normal volatility - a tick or three during extreme volatility. Less in liquid instruments - more in less liquid. How do you arrive at that conclusion? What method did you use? One thing you are somewhat forced into when trading index futures is a concept called specialization. Since you'd only be trading one or two indicies, you develop systems that are tailored to the index taking into account its unique character and vagaries. That significantly reduces risk. You'll learn what type of stops to use and where they should be placed per setup. Your risk will be well defined and managed. Many futures traders, even some scalpers, use OCO (one cancels other) bracket orders. They predefine their exits and stops. But, your rules need to be changed to compensate for the PDT if you wish to continue trading stocks. It won't be an easy thing, but since the rule isn't going away, it behooves one to adapt. Index futures. E-mini S&P 500 futures. Greatest thing since sliced bread. I first started out in stocks about 20 years ago. That's all I knew back then. Slowly moved into stock options to supplement. Then go involved trading OEX options. Did that for about 5 years. Then got involved with S&P 500 futures. This is before Globex and the e-Minis existed. Hard work back then. Delayed BMI satellite feed, late reports, bad fills, slippage galore but I made a system to compensate for all these things. It was either that or quit. Then the E-mini came out. I didn't jump in right away since the volume wasn't there at first. Neither was an appropriate feed available at first. But two years later, I took the plunge and never looked back. Since then I've traded, oil, YMs, EUR/USD & GBP/USD currencies. But nothing is quite like the eMinis. But that's a personal preference thing. I trade them both intraday and long term. Are they risky? Sure in that they require you to do your homework well in advance before your first trade. And it can take months, even a year to build a solid system. You can build a modular system. One which looks for certain setups during certain market phases (trending up, trending down, or transition) as denoted by moving averages. as each "module" is completed, you can trade that particular market phase while you develop the other modules. In any event, there's a reason their (ES) volume continues to explode like no other future's or option contract. It's the best of all worlds. Superior liquidity, superior order matching system (Globex), special tax treatment - 60/40 rule, low barrier to entry (many $500 day trade margin brokers with nice front ends) and manageable risk. Best wishes with your trading and trading decisions.
I'd rather base it on the rule on FINRA's page specifically addressing this then a blurb on the SEC page: http://www.finra.org/Investors/SmartInvesting/AdvancedInvesting/DayTrading/P005906 And from that page is this: Does this rule change apply to cash accounts? Day trading in a cash account is generally prohibited. Day trades can occur in a cash account only to the extent the trades do not violate the free-riding prohibition of Federal Reserve Board's Regulation T. In general, failing to pay for a security before you sell the security in a cash account violates the free-riding prohibition. If you free-ride, your broker is required to place a 90-day freeze on the account. Also the fact that the majority of brokers (if you call and ask) will tell you the rule only applies to margin accounts. The reason nobody gets into it much is because with stock you can't really successfully daytrade to any extent in a cash account because of Reg T. Options a little more so obviously. You're wrong. I promise you. Hush now.
Okay I take that back. I want you broker. Reading the Notice, the PDT rule is explicitly designed to protect the CLEARING FIRM from the risk posed by day traders with small accounts.. There is NOTHING in the written intent stating that it is to protect the trader. IB freezes one's account after 3 trades in one week, one can not enter a 4th buy. Evidently by law, it could then allow the trader continue to trade on a cash only basis, but IB does not allow that. Evidently ThinkorSwim has a similar policy. (it's head up it's ass) http://www.finra.org/web/groups/industry/@ip/@reg/@notice/documents/notices/p003881.pdf