Why The Pattern Day Trader Rule Proves The SEC Rivals Osama Bin Laden In Terrorism
Posted by timothysykes on Wed 4th of Jun, 2008 01:25:35 PM
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Yup I said it. While making a nice quick 5+% American profit, or $350ish, in an hour on my LGDI trade a few weeks ago, my blood boiled over due to the missed opportunities caused by the SEC’s pattern day trading rule. And while I’ve attacked it in the past, there was no formal summary post that explained all my key points. Considering how many stocks are in play today and the fact that I am forced to ignore 99% of them, it’s time I unleash this fury.
The formal definition of this inane rule is HERE, and once you read it, you’ll begin to understand why I call it the Reign Of Terror Rule. In fact, I’ve got an entire category devoted to it as I’ve documented each and every time it’s interfered with my trading since I began TIM in November 2007.
Basically, if your trading account is below $25,000—as are the accounts of so many poor people out there—you can only day trade (meaning in and out the same day) 4 times per week. If you trade more than that, you get flagged as a pattern day trader and your account gets restricted because you’re considered evil, as most day traders are believed to be. (Yes sometimes you can trade a few more times than that—since its all rather gray area and the brokerage firms themselves despise this rule—but my point is there should be no limits whatsoever!)
Even though I’ve still got over $500,000 in liquid cash to trade with, I went back to my $12,415 roots specifically to draw attention to this injustice because most people, including industry big wigs, don’t even know about it. After all, the last time I had this little money, it hadn’t been instituted and I’m forever thankful since trading freedom allowed me to get rich.
Now, in my quest to repeat my feat of turning thousands into millions, I’m only up 50% in 7 months, thanks in large part to the obstacles created by this rule, whereas if I wasn’t chained down, it’d be more like 100-200% maybe even 300%. No joke—click that category above and see what kind of crap with which I’ve had to deal.
I know from countless blog post comments and emails from you guys—even you non-trading addicts out there—that it’s absolute hell for you too. So, in the comments section of this post, please write about any and all experiences with this rule in order for the freedom-hating SEC can better understand the problem. Sad to say, but I think the only way to get the attention of these terrorists—and that’s what they are, using this rule to attack wannabe day traders everywhere because they disapprove of our values— is if the comments section of this post surpasses the 9/11 body count, which was 2,974. But since this is about one of our great nation’s most important ideals—freedom—it’s imperative that we succeed and show these terrorists what we’re really made of!
Please be honest—thanks to all the easy money that causes us to act like immature pricks (see EliteTrader.com and my inappropriate terrorist comments (although this is what it’s gonna take to get people’s attention….sadly)), we day traders already have a bad enough reputation.
Here, I’ll start—See some examples of what I’m talking about HERE, HERE, HERE, HERE and HERE and that’s all just in the last few weeks! Feel free to refer to problem # in your comments if you have similar experiences/thoughts:
Problem #1: Like limiting a painter to a certain number of brushstrokes
Day trading is all about trial and error—it’s best to test out the waters with small positions, scaling in and out depending on the price action. When I’m limited to one position per day—at most—I’m forced to be perfect in my timing, which not only is incredibly difficult, if not impossible, but because I’m trading smallcaps and microcaps, this rule has made this game more dangerous than it has to be. Like painting, trading is an art—can you imagine a rule where an artist was limited to 1 brushstroke/day? The painting not only would take forever but it would suck! This is wrong. I am most profitable when I can scale in and out easily, cut my losses quickly and re-enter when the price action is more to my liking.
Problem #2: Hurts Profit Potential
Since microcaps and smallcaps are somewhat illiquid, worthy trading opportunities come about only so often and when they do, they usually come in bunches. Thanks to this injustice, I often find myself unable to trade all the worthy opportunities out there, hurting my profit potential.
Problem #3: It’s Gosh Darn Un-American!
Uhhh, isn’t this a free country? Shouldn’t we be able to get rich in the stock market? I got rich by trading thousands upon thousands of stocks and I made plenty of mistakes because thanks to any other ridiculous SEC regulations, there was no way for me to ever find/have a mentor. Now that I am that mentor that soooo many people need—teaching PennyStocking to anyone interested—the SEC has this rule that basically says the way I got rich in 4 years—playing the allegedly most random /dangerous stocks in the world and without using leverage—is too dangerous?!?!? Oh no you didn’t! My strategies are still gonna make people rich—quicker than most—but thanks to these SEC Bin-Laden-like-freedom-hating bastards, it’s just gonna take people with under $25,000 a little longer.
Problem #4: Hurts Short Sellers Who Add Market Liquidity
That’s right I said it, short sellers are good for markets—despite all the crap we take, we bring reason and liquidity into one sided markets, especially those that are filled with hype and manipulation like the penny stock market!
Problem #5: Punishes the wrong people
I understand this rule is supposed to protect those who can’t afford to lose much money and since they have little $, they are assumed to be unsophisticated traders/investors (who besides crazy TIM doesn’t use all their $ just to prove a point like this?!?!), but this rule is only applicable to those of us who trade securities—by and large who don’t even use leverage—while allowing traders in infinitely more dangerous niches total freedom. Those are the guys about which Osama Bin SEC should worry—their trading has proven capable of bringing down legendary institutions HERE and HERE and economic collapse!
So,go on and leave short or long comments, but comment often—in the words of William Wallace, I say to you “Aye, fight the SEC and your future in the financial industry may die. Run, and it’ll live… at least a while. And dying in your firms, many years from now, would you be willin’ to trade ALL the days, from this day to that, for one chance, just one chance, to come back here and tell Osama Bin SEC that they may regulate our industry, but they’ll never regulate… OUR FREEDOM!
Now you can Twitter any questions/comments to TIMhelp and obviously you can follow TIM on twitter too!
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TIM Alerts
View All| Date | Stock | Position | Ideal Exit | % Gain |
|---|---|---|---|---|
| Nov 24 | KVHI | Short | $3.70 | 18% |
| Nov 20 | STSX | Short | $3.10 | 11% |
| Nov 18 | PERY | Short | $3.75 | 25% |
| Nov 11 | IIJI | Short | $2.80 | 5% |
| Nov 6 | CVI | Short | $4 | 15% |
| Nov 5 | MECA | Short | $1.95 | 51% |
| Nov 4 | CVI | Short | $4.81 | 4% |
| Nov 3 | NAK | Short | $3.20 | 5% |
| Oct 29 | EVC | Short | $2 | 26% |
| Oct 28 | HSNI | Short | $6.80 | 7% |
| Oct 28 | HSNI | Short | $5.75 | 4% |
November: 9 alerts, 15% avg gain
October: 11 alerts, 14% avg gain
Actually, you can only day trade 3 times. 4 times and you are flagged according to what I have read.
“A pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as any customer who executes 4 or more round-trip day trades within any 5 successive business days”
http://en.wikipedia.org/wiki/Pattern_day_trader
so…ROYL below 9, what’s your target?
FOF YEAH!
It should close the gap @ 8.40
Yeah, the daytrader rule is exactly what lead me to one of my biggest trading losses ever…JRJC. It was a trade I shouldn’t have got into in the first place, but what made it worse was the fact I couldn’t get out quickly without violating the rule.
Good trading means taking losses quickly, and this rule completely prevents that
I started trading with real money a week ago and am already being limited by this rule…
Couldnt get any royl shares with scottrade
Level II shows someone is waiting to buy 12000 shares of NTI at $10. Does that mean this person knows NTI is falling back to $10 or what?
Squeeze on GRO
Yes the potential profits lost hurts, but it is the real losses that hurt even more. When you are limited with trades you end up holding these POS longer than you would if you could get back in. We get squeezed because we think we won’t get a chance to get back in and before you know it you’ve got one big loss instead of just cutting losses quickly and looking for a new entry.
This rule really does hinder my ability to make so much more money that I KNOW I can make- I always have to choose between 3 stocks- and sometimes the one I pick is not the favorable one that tanks or rise that fastest, among the 3
Keith you have to open an account with thinkorswim.com and use tim as your reference.
Long GRO @ 6.75
I’ve been watching the Level II on NTI all day- nowhere near the type of manipulation as other stocks ‘in-play’ can sometimes show, but I’ve definitely seen the ASK (or buy) side giving up on fills and lowering the price. As to your big order at $10, that could be real or fake- no way to know until we get closer and see if it disappears, shrinks, or breaks into pieces. One thing’s for sure- Market makers had fun on the low volume pop above 15 this morning (these low floaters can be crazy).
Tim good post! I’m over the 25k problems at this point, but have definitely been there and know how bad it sucks!
I’m a newbie trader from the UK, and currently I’m having to decide whether I should trade in the US or UK markets. This rule alone, however, looks like a great reason to stay in the UK.
It makes me wonder if the SEC is likely to have discouraged many more non-US traders like myself in the past, losing out on hot money flows (when we buy shares) and additions to market liquidity (when I short-sell shares)… If thousands of other foreign investors decide not to operate in US markets for the same reason, I wonder how great an affect this will have had/is having on the US economy?
guess my comment didn’t make it through at first… You can do 3 daytrades and on the 4th you are a pattern daytrader. “A pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as any customer who executes 4 or more round-trip day trades within any 5 successive business days”
http://en.wikipedia.org/wiki/Pattern_day_trader
guess my comment didn’t make it through at first… You can do 3 daytrades and on the 4th you are a pattern daytrader. “A pattern day trader is defined in Exchange Rule 431 (Margin Requirement) as any customer who executes 4 or more round-trip day trades within any 5 successive business days” according to wikipedia.
One of the obviously bad parts of the rule is that you might not want to get out of a position because you will violate the rule. That is ridiculous! You CAN get out but if it is your 4th daytrade you might get flagged.
COnsidering re-shorting gro and hold overnight.
Will wait for possible squeeze.
Any thoughts?
You could divide your capital between 2 or more accounts. Since you are not using all capital on one trade it should not be a problem. Then when you are up to 25k just combine to make it easier.
With the market as volatile as it is people who can’t daytrade are at a huge disadvantage. I’m a little surprised there is no class action lawsuit yet.
i got squeezed on grow, short 6.47 out 6.67. saw it break 6.50 a few tmes and jumped in
Do what cacao says, I do that, right now over pdt on Ibrokers (tomorrow will be free) and have all trades left on TOS, and have taken the opposite side of the trade in the other broker to get net 0 position. closed both next day to avoid day trade.
I think in order to make a strong case we should need some statistics on how many people has loose their shirt because overtraiding and before the PDT rule and compare to how many people has lost their shirts after the pdt rule. we’ll need that hard evidence to get the case going. Other way it will just look like greedy day traders against poor grandma.
u shouldnt have to split your account into 2 and pay double commissions, u shouldnt even have to have to be considering work arounds…this is a like u being in a wheelchair and living in a house with no ramps, only stairs! (well u dont have to go upstairs….)
It should not be the responsibility of the SEC to help stop people from losing their own money. It’s the responsibility of the people doing the trading and no one elses…
THoughts on re-shorting gro?
A am i becoming a pig?… oink oink?
Well there is some logic behind it. And I don’t think it’s just because the SEC thinks they can’t afford to lose it (there’s no law preventing the same person from gambling all that money away in Vegas). 90% of traders lose money, and probably most of them are inexperienced traders - who probably have small accounts. So I think the SEC is protecting them from the predators out there - the brokerages who encourage active trading through their marketing and the experienced professionals with lots of experience and sophisticated trading systems. Without the rule, an inexperienced trader’s $20,000 account could end up in the account of an experienced professional in a short matter of time. Sure, it sucks for people like Tim Sykes who have gone from $10,000 to $1M, and then decide to start trading with $10,000 again. But the majority of people with $10,000 accounts are probably inexperienced and probably don’t know where they can get an edge in the market.
ROYL gap down tomorrow?
level II in TOS??? it doesn’t show much.. i’m I missing something
short 500 PTEK at 5.15, will add if it spikes tomorrow, but this could just fall apart here
cred breaking down…
Bye bye baby..
PTEK should move to 4.70 quickly Iam in short from 5.48 this norning
TomT,
This forum post might help. Looks like more detailed Level II stuff is in the works at TOS.
http://timothysykes.com/forum/viewtopic.php?id=480
nice fade on GRO too bad i blew all my shares of it and took a loss
out at 4.90, not ideal, meeting, be back in an hour cya guys, good solid trading day!
Thx alot GT4NE1
Shorted ptek at 4.78 feeling a little squeezee, holding overnight.
GGC shorted @ 4.81 FYI only trade at own risk
I live in Canada and my online brokerage does not enforce the pattern day trading rules, bless their hearts……..
What’s with these NTI trades? A couple hundred shares go for ~14.10, followed very quickly by a couple hundred shares at 14.3499. It’s happened about 4 times now.
Occupation is Terror
There goes PTEK
Cool site! I am watching and learning. Lots of good trades today..congrats!
Hey al I am not a good trader but your short in GGC wasnt a great setup. There is too much support just below your entry around 4.75 and then more @ 4.60 which limits your downside potential.GL though
Is HEV being pumped by paid mailers or a newsletter? Or is it just going up because it’s a Li-Ion battery company?
Are we going to see GRO get to unchanged on the day for a Spinner top?
I know off topic- but who is the girl in the background on CNBC- gotta get to Harvard!!!
Hey everybody, I’m back! What’s happened?
Al, duh, we always trade at our own risk. Thanks for the warning though.
Who’s shorting GRO overnight? Anyone? Ymaighlejihdf? (I’m too lazy to scroll up and look at how to properly spell your name)
Thanks Keith