Navigating PDT Rules by Switching to a Cash Account

Introduction

Day trading has become increasingly popular, thanks to platforms like Robinhood and Webull that make trading accessible to everyone. However, the Pattern Day Trading (PDT) rule can often be a stumbling block for traders who don't have a large capital base. In this blog post, we will explore what PDT is, how a cash account can help you avoid this rule, and how to switch to a cash account on Robinhood and Webull.

What is Pattern Day Trading (PDT)?

The Financial Industry Regulatory Authority (FINRA) in the United States defines a "Pattern Day Trader" as an investor who executes four or more day trades within five business days in a margin account, provided that the number of day trades makes up more than 6% of the customer's total trades in the margin account for that same five business day period.

If you are flagged as a Pattern Day Trader, you are required to maintain a minimum equity of $25,000 in your trading account. Failure to maintain this minimum balance will result in restrictions on your trading activities.

How to Avoid PDT by Switching to a Cash Account

One of the most effective ways to avoid PDT rules is by switching to a cash account from a margin account. With a cash account, you are only allowed to trade with the money you have deposited into the account, which means you are not borrowing money to trade, thus sidestepping the PDT rule.

Advantages:

• No $25,000 minimum balance requirement

• Avoid PDT restrictions

• Greater control over your own money

Limitations:

• Cannot short-sell stocks

• Must wait for trades to settle before re-using funds

How to Switch to a Cash Account on Robinhood

1. Open the Robinhood App: Make sure you're logged in to your account.

2. Go to Account: Tap on the 'Account' icon in the bottom right corner.

3. Navigate to Settings: Scroll down and tap on 'Settings.'

4. Select Account Type: Here you'll see your current account type—either margin or cash. Tap on it.

5. Switch to Cash Account: Follow the on-screen instructions to switch from a margin account to a cash account.

6. Review and Confirm: Make sure you read the rules and implications of switching to a cash account before confirming the change.

How to Switch to a Cash Account on Webull

1. Open Webull App: Log into your Webull account.

2. Go to Menu: Tap on the menu icon (three horizontal lines) in the bottom right corner.

3. Navigate to Account Details: Under the 'My Account' section, click on 'Account Details.'

4. Select Account Type: You'll find your current account type displayed. Tap on 'Switch to Cash Account.'

5. Follow On-Screen Prompts: Follow the steps displayed to switch your account type.

6. Review and Confirm: Be sure to understand the limitations and advantages before you confirm your decision to switch to a cash account.

Conclusion

Avoiding PDT rules can offer traders with smaller capital more flexibility and freedom in their trading strategies. A cash account is an effective way to achieve this. However, it comes with its own set of limitations that traders should be aware of. Switching your account type on Robinhood and Webull is relatively straightforward, but make sure to be aware of the trading limitations it will impose.

Happy trading!