Robinhood employs specific rules to protect investors, and one of them is the Pattern Day Trading (PDT) rule. When a margin account holder executes four or more day trades within a five-day consecutive trading period, they are generally flagged as pattern day traders. Once classified as such, the account then attracts a 90-day freeze penalty, which means no buying or selling of any stocks or options for the full 90-day probation period. So, how can one remove their status on Robinhood as a pattern day trader?
The first option is to deposit $25,000 in funds into the user’s margin account, allowing their account the benefit of unlimited day trades. The other option would be waiting for 90 days before initiating any new positions. Once the PDT flag is removed, you can place about three trades every five business days.
Now that you have known and understood how one is flagged and how one can remove their flag as day traders, we can now dive into a more in-depth analysis in the rest of the article to present the most exciting facts about Robinhood accounts. Such facts include and are not limited to; what happens if one is marked as a pattern day trader? Can one day trade on Robinhood without $25,000? Study on to find out more.
What happens if you are marked as a pattern day trader on Robinhood?
A pattern day trader (PDT) is a regulatory designation for investors that execute four or more day trades within five trading days using a margin account. Margin accounts allow traders to trade on margin or leverage their capital; in other words, the traders use borrowed funds to invest.
When a margin account holder executes four or more day trades within a five-day consecutive trading period, they are generally flagged as pattern day traders.
Once this happens, the account is typically assigned a 90-day freeze penalty, unless $25,000 or more is deposited into the account. Note that while your account is flagged, all continuous use of the account would attract more imposing penalties like more extended restrictions.
Is pattern day trading illegal?
Pattern day trading is not technically illegal. However, it is not permissible on Robinhood, especially if your portfolio is below $25000 is worth, even just by $1. One of the main reasons why pattern day trading is discouraged is because it is precarious, and traders can quickly lose vast amounts of money in one go.
To the day trader, this restriction may seem to be a bit too much, but it is a way to protect the regular trader from blowing up all their money. It is also a helpful rule as it prevents traders from spending too much time concentrating on the market as they wait for the prices to favor them. Considering they make trades every minute or hour, it can be very strenuous and requires a lot of attention and keenness.
Is it bad to be marked as a day trader?
Yes, it is. The reason being that once you are flagged, you be requested and required to either add money to your portfolio to meet the minimum requirement of $25000, that is, if you want to continue trading the next day. Failure to meet the requirement would mean you will not continue to trade either in stock or options for the next 90 days, and as we all know, for a trader, not being able to trade would mean huge losses and wasted time and opportunities for them.
How to remove pattern day trader status Robinhood
So now that we have identified how one is marked as a day trader, the next natural question would be, how can one remove their pattern day trader status on the Robinhood account?
The first option for any client would be to deposit funds into the margin account, bringing the account value greater than $25,000. When the amount is deposited before the market closes, all the restrictions will be reversed. The greatest advantage of this option is that accounts with $25,000 or more usually are allowed unlimited day trades.
The second option would be waiting for 90 days before initiating any new positions. Depending on your broker, one could ask for a Pattern Day Trader reset, or a PDT reset as their final option; this would be the best option since FINRA allows brokerage firms to remove the PDT flag from a customer’s account every 180 days. Once the PDT flag is removed, you can place about three trades every five business days.
Common steps that are followed to request for the PDT reset include:
- Accessing the client portal and accessing the message center through the support section
- Then from within the portal, one would be requested to choose a pattern day trader request, which would then launch the PDT tool; the system will then check if the account is eligible for a PDT reset or not.
- You will then have to check on the box to acknowledge the consent and offer your declaration that you have read and understood.
- Finally, one would click the send reset request button and select yes to submit the PDT reset request.
- The firm would then review the PDT reset request; usually, it takes 1-2 days for the request to be processed.
What happens if you disable pattern day trader on Robinhood?
If you choose to disable the pattern day trader option, you will still get a notification when you place a third-day trade within five days. If you lack $25,000 in portfolio worth, the only choice would be to cancel the trade to avoid being marked as a pattern day trader.
In short, there is no going around the rules that Robinhood has stated about day trading.
Can you day trade on Robinhood without 25k?
Yes, you can. Although there are pattern day trader restrictions, those restrictions apply only to those traders with Robinhood standard and Robinhood gold accounts. For traders with cash accounts, they can trade without the restrictions.
This rule is only applicable to margin accounts; these accounts allow a trader to trade on the margin or trade on borrowed funds.
If this rule were not there, the traders would end up with a lot of debt, especially if they lost.
Being a profitable trader requires one to have at least an equity of $25000. Starting with less capital can result in the trader being frustrated as the profit margins are low while the risk is very high.
In as much as you cannot trade without $25000, the advantages of the restriction outweigh the disadvantages, i.e., it protects the trader from risks and going into debt.
The majority of day traders trade with borrowed funds since they are in it for a quick profit. So, they end up leveraging on any money they have for other uses, and in the case, a loss is made, they end up in debt.
We also have to appreciate that for one to be a profitable trader, you require good money just like any investment; you also require time and practice.
In conclusion, we can finish with this; day trading has become more popular now than ever. All over social media, there are folks swapping tips and ideas on their way to financial freedom. But as we have seen, day trading comes with a lot of risks. So, if you are interested in day trading, it’s best to ease in slowly, at least until your account has $25,000 or more. Until you get to that point, it is imperative to understand the nuances of your brokerage margin account rules, and because each brokerage can vary, check the fine print about pattern day trading rules; because as we illustrated above, not everyone is as forgiving to the young trader with speed in mind and getting locked out of your account can be a pricy mistake to make