How To Avoid The PDT Rule On Robinhood (NEW + UPDATED)

Summary

In this video, the creator discusses various updates to Robinhood, including the release of Robit Legend, index options, and futures trading. They explain how to avoid the Pattern Day Trading (PDT) rule, which limits day trades in a 5-day window unless you maintain a $25,000 balance. Solutions include using a cash account (which avoids PDT restrictions), having multiple accounts (to increase the number of day trades), or trading futures (which aren't subject to the PDT rule). The creator also highlights how futures can provide tax benefits and more flexibility for traders.

Takeaways

• 😀 Robinhood has introduced several updates, including Roboit Legend for more advanced traders, IRAs, index options, and futures trading.
• 😀 The Pattern Day Trade (PDT) rule, set by FINRA, limits traders to three day trades within a 5-day span unless they maintain a $25,000 margin account.
• 😀 The PDT rule rolling record means you need to wait 5 days before your day trade count resets.
• 😀 A cash account can help avoid the PDT rule, allowing trades to settle in one day (T+1), letting traders make daily trades with available funds.
• 😀 In a cash account, only settled cash can be used for day trading, meaning your trading is limited to the cash you've already settled.
• 😀 Robinhood now offers the ability to have an IRA alongside an individual account, allowing traders to avoid the PDT rule by splitting trades across both accounts.
• 😀 Multiple accounts, like opening individual accounts with other platforms (e.g., Webull or Schwab), let you increase the number of day trades you can make in a 5-day period.
• 😀 Futures trading is not bound by the PDT rule since it is not regulated by FINRA, offering more flexibility for frequent trading.
• 😀 Trading futures on Robinhood has tax advantages, with a 60/40 split between long-term and short-term capital gains, which is favorable for profitable traders.
• 😀 Although Robinhood's margin requirements for futures are higher than some other brokers, it remains a practical option for users familiar with the platform.
• 😀 The speaker recommends exploring how to trade futures on Robinhood for those who are already trading major ETFs like SPY, QQQ, or IWM, as it helps avoid the PDT rule.

Q & A

What is the PDT rule and how does it affect traders on Robinhood?

The PDT (Pattern Day Trade) rule is set by FINRA, and it limits traders to three round-trip trades within a 5-day period. This rule applies to margin accounts, meaning if you exceed three day trades in a rolling 5-day window, you can face restrictions unless you have more than $25,000 in your account.

How does Robinhood's platform cater to more advanced traders?

Robinhood has introduced 'Robinhood Legend,' a platform for more technical, advanced traders, which includes better tools and features for trading, although it is not considered 'super advanced.' The platform is designed to support a higher level of trading, such as offering Futures and index options.

What changes did Robinhood introduce regarding IRAs and individual accounts?

In 2023, Robinhood allowed users to have both an IRA (Individual Retirement Account) and an individual taxable account simultaneously. This means traders can hold an IRA while still having an individual account, which increases flexibility in trading.

How do cash accounts on Robinhood help avoid the PDT rule?

Cash accounts allow users to avoid the PDT rule because they are not subject to margin regulations. In a cash account, trades settle on T+1 (trade date + 1 day), meaning users can trade more frequently, but they are limited to the cash they have available from settled trades.

What is the benefit of T+1 settlement for cash accounts on Robinhood?

With T+1 settlement, if a trade is made, the cash from that trade becomes available the next day, allowing traders to reuse their funds quickly. This helps active traders avoid waiting several days for funds to settle, as was the case with T+2 in the past.

How does using multiple accounts help avoid the PDT rule?

By using multiple accounts (e.g., Robinhood, Weeble, Schwab), traders can spread their day trades across these accounts. For example, having three accounts means a trader could take up to nine day trades in a 5-day window (three trades per account). This approach requires margin accounts, as cash accounts would not provide the same flexibility.

What is the advantage of trading futures in Robinhood to avoid the PDT rule?

Futures trading is not subject to the PDT rule because it is not overseen by FINRA. This allows traders to execute as many trades as they want, provided they meet margin requirements. Additionally, futures provide favorable tax treatment, with 60% of gains taxed as long-term capital gains and 40% as short-term.

How do futures trading and margin requirements differ on Robinhood compared to other brokers?

While futures trading on Robinhood offers the advantage of not being subject to the PDT rule, the margin requirements are higher compared to other brokers that specialize in futures. This could be a disadvantage for traders who are more accustomed to lower margin minimums at other futures brokers.

How does the availability of futures trading impact traders on Robinhood?

The availability of futures trading on Robinhood allows traders to avoid the PDT rule, making it appealing for those who want to trade frequently without restrictions. However, this may appeal more to traders who are already familiar with Robinhood and its platform, as opposed to those who are focused solely on futures.

What practical advice does the video offer for traders using Robinhood to avoid the PDT rule?

The practical advice is to either use a cash account, open multiple accounts with different brokers, or switch to futures trading if you're active with instruments like SPY, QQQ, or IWM. Futures trading is a great way to avoid the PDT rule while benefiting from favorable tax treatment, but it requires meeting the platform's margin requirements.