Pattern Day Trader Problems | Podcast Episode #249

0:07
Hey, I’m Ryan Mallory, and this is my swing trading the stock market podcast. I’m here to teach you how to trade in a complex, ever changing world of finance. Learn what it means to trade profitably and consistently, managing risk, avoiding the pitfalls of trading, and most importantly, to let those winners run wild.

0:25
You can succeed at the stock market, and I’m ready to show you how. Hey everybody, this is Ryan Mallory with swing trading the stock market in today’s episode is going to be a good one because we’re gonna talk about the pattern day trading rule as it applies to volatile stock trading markets.

0:42
And we are in one of those right now with the S&P 500, NASDAQ Russell 2000 seeing significant selling over the last 4.5 months. So, how does that equate to those who are trying to not be flagged as a pattern day trader?

0:58
We’re gonna talk about all of that. With this email from a guy that we’re going to call Ga. Now, if I remember correctly, there was a guy named Gator in the movie Other Guys, one of my favorite comedies, man, it was an amazing, amazing movie. So if you haven’t seen the other guys yet, it stars, I think, Mark Wahlberg and Will Ferrell.

1:16
Definitely check out that movie. So, gator rights, right, this question may be difficult for you to answer because it involves a problem that you don’t have to deal with. My trading account amount is in the mid to high 4 figures, so I have to deal with day trading rules.

1:33
So we’re talking about like 5000 to $9000 I would say. He says lately in this highly volatile market, I sometimes find myself opening up positions that immediately experience profits past my profit targets. In the same day. For example, this morning I opened up bearish positions on GME, which is GameStop in SOXL, which is the bearish 3X inverse ETF of the semiconductors.

1:58
Gator goes on to say, they both quickly blew past my 25% profit target into 40% or higher. I already have one day trade on my account right now, and I was afraid to add more in case I needed them later. The first day trade was to close out a position I opened on a very volatile day.

2:15
I experienced huge losses and let my emotions overtake me, so I closed the position, which later proved to be a mistake. Anyway, I didn’t close the GameStop and SOXL positions for profit by using day trades, and now I am watching my profits slowly drain away from me, even turning into losses.

2:31
I don’t consider myself a day trader, but these days I feel like I need to be as agile as possible. Luckily I still have until the end of this week and the end of next week on these positions. I’m trying to do my best at adapting to this bear market, but so far I am failing miserably as I am down over 50% this year in this account.

2:50
My question is, how should I go about strategically using my day trades? Is it best to use them for quick profit taking or quickly escape poor trade entries in an emergency? Since I have so few day trades, I worry about running out when the market is volatile as it is these days. Thank you for all of your great advice on this podcast, and I look forward to the next episode.

3:09
Sincerely, Ga. There is a lot to unpack in this particular email, and it’s not even a long email, but man, he said some things that really needs to be addressed. And as always, with most of these emails, there’s usually one question that they’re focused on, but their explanation and their lead up to that question usually creates a whole other set of issues that has to be addressed.

3:34
But first, what am I drinking? I am drinking. 4 roses, small batch select, man. The Knob Creek 15 was pretty good. I have high hopes for the small batch select. I love 4 roses. I think their small batch and single barrel is great. This is the small batch select though. They actually use 6 of their 10 bourbon recipes in this one and Should be pretty exciting.

3:56
So when I give it a good whiff, it’s almost like you’re walking into a candy store. I mean, it’s really, really delightful. And then that taste that I’m picking up, it’s like a nice mint flavor. But then you get the spice that comes in afterwards, and it’s not like the Knob Creek 15 year from before where it just overwhelms you and doesn’t let you at least savor that initial taste and flavor that you’re enjoying.

4:20
It starts off subtle and then it grows on you and you really think, man, even the finish with the spice, it’s really good. And this is not like a low proof bourbon. This is 52% alcohol, that makes it 104 proof. Let me tell you, start to finish, it’s really good.

4:39
And it’s a $60 bottle that you can get at most stores. And the thing that I like about the fetish is that it gives you enough time to enjoy the taste, and then when you get the fetish, you’re still like reminiscing about how wonderful that taste was. So it’s just really good.

4:56
I mean, it’s one of those things too where you take really slowly because you’re just savoring each and every taste. Now typically after I have dinner or lunch or breakfast or whatever it might be. I’ll take a breath mint afterwards, right? But then there’s sometimes where I have like this really good steak dinner, and I’m saying to myself, no, I don’t want a breath mint, I wanna enjoy the tastes and the flavors that reside in my mouth after I had this just delectable dinner.

5:21
And it’s the same way with the 4 roses select. It’s like, I just want to enjoy the flavor that it leaves behind. I mean, it is really, really good. So on a scale of 0 to 10, I’m giving this an 83. That’s a really, really high end grade. I really like 4 roses select.

5:37
Now. We gotta get back to Gator here and Gator is struggling with the pattern day trading rule. He’s struggling with the fact that I’m in these trades, he’s using options, and these options, they’re increasing by 25 to 40% in a single day. But then he has some day trades that he’s already made on his account and he’s worried about becoming A pattern day trader, and he doesn’t want that to happen.

5:59
Now, for those who don’t know what a pattern day trader is, according to Fender rules, it’s considered when you execute 4 more day trades within a 5-day business cycle. So when you hit 4, you get tagged as a pattern day trader, and then you have a whole bunch of restrictions on your account where you can’t day trade anymore.

6:15
So he’s trying to avoid that. And what happens as a result is that he’s letting these 40% profits that he has in hand turn into a loss because he’s afraid to actually get out. Now, he’s doing a lot of things wrong here. Let me tell you, I’ll be the first one to say that the pattern day trading rule is a crock of crap.

6:34
I mean, who is somebody else to say who lives in all high and mighty in their little ivory tower to tell everybody how or what they should trade? And they’ll say, oh well, we’re looking out for the little guy. But yeah, Mr. Hedge fund guy or, you know, mister accredited investor can go trade whatever he wants.

6:49
It’s unfair, it’s an unequal playing ground, and it should never be allowed. But I don’t have the authority to strike that down, unfortunately. It’s just stupid because it’s just more regulation that just tells you what you can and can’t do with your money as if they know what’s best for you.

7:08
I mean, heck, look at the freaking government right now. They can’t even balance a budget. They’ve run us up $30 trillion in debt, and the same people who try to regulate the economy and regulate our taxes and how we spend, they’re gonna tell us how we’re supposed to trade and invest saying, oh no, we think it’s against your best interests.

7:26
To do more than 3 day trades in a single day. If you do a 4th, we’re gonna flag you as a pattern day trader. I mean, the whole thing is crap, and they’re already trying to do that now with the Inverse ETS. They’re wanting to start making that an accredited investor thing for whatever reason, they don’t like it.

7:42
So, hey, let’s regulate it. Let’s make it harder for people to invest because ultimately what I think it is is they don’t want normal ordinary Americans to have any kind of access. To things that might actually be able to help them if they actually know what they’re doing, of course.

7:58
Help them during market downturns. Hey, these people are making money shorting the market with a leveraged 2 X ETF. Oh, well, let’s take that one away. They might need to be an accredited investor to be able to do something like that. Look, I can whine and moan about this all day long and it’s not gonna change anything.

8:16
There’s a pattern day trading rule out there that screws over a lot of investors. And what’s funny is like, here you got Gator. He’s trying to make a profit in a trade, and he’s having to worry about the pattern day trading rules. So is it actually helping him? No, it’s actually hurting him. And that’s what happens when you have regulation.

8:32
It just makes more problems and they don’t care. It’s not like they’re going back and reviewing. It’s like, oh, let’s see if this is actually doing what we intended for it to do. No, they don’t care. They just feel all high and mighty that they can regulate people at will. OK, but one thing that I always like to do in my trading is I like to lose fast and I like to win slowly.

8:50
Most of the time, if I do have a day trade, it’s because it’s a loser. Now that doesn’t mean all my losing trades are day trades. They’re not. Most of them do go beyond one day. But when I do have a day trade, it’s because it’s a loser. And yes, volatile times are going to create greater potential for day trades, especially in terms of losing trades, because if you’re on the wrong side of the trade, you can get stopped out and boom, you’re done with that trade and you can get these, especially like in the market we’re in right now, here in May of 2022.

9:19
You’re getting 3 and 4% swings on the indices on a regular basis. So if you’re on the wrong side of the trade, it doesn’t take much for you to get stopped out, especially if you’re using like a leveraged DTF. And Gator here asks me, how should I go about strategically using my day trades?

9:35
Well, first off, you shouldn’t be looking at a day trading strategy whatsoever. With day trading, you can’t have something like a patterned day trading rule hanging over your head. You gotta get it over 25,000 or it’s not worth it. But if you do find yourself where you’ve had 3 trades and all of a sudden.

9:52
You know, you’re up against that 4th 1, you don’t want to take it. Don’t place any more trades until you can free one up. I mean, that’s really the best way. If you’re trading such volatile stuff and he’s trading GME and he’s trading SOXL, SOXL is a 3X ETF and then you got GME which can move 10 to 15% on the whim.

10:09
But not only is he trading that stock in ETF but he’s also using options on them. So that means the volatility is really through the roof. That’s why he’s getting these 40% moves in a single day. But really what he’s engaged in is day trading. And he’s trying to figure out a way to extend it out to a swing trade, and that’s not a good idea, because those two vehicles, SOXL and GME, are rife with volatility.

10:30
So if you think you’re gonna be able to avoid the pattern day trading rule by trading those things regularly, it’s gonna be very hard. And then if you’re trying to avoid it by not selling out of a position that you should have been selling out of, then you’re taking a loss. I mean, options trading, GME and SOXL that is just asking for problems.

10:46
And the other question to ask ourselves is, Gator really looking at managing the risk, or is he really trying to extract massive amounts of profit out of the market? Well, anytime you’re trying to extract massive amounts of profit out of the market, you’re setting yourself up for massive amounts of losses.

11:02
So, the best thing you can do as a trader is try to find the opportunities where the risk is the tightest, where the volatility is less, because if you’re going into these high volatile trades and you’re using options on them, and you’re trying to not be a day trader, You’re setting yourself up for disaster there.

11:19
And here he is. He’s let a 40% profit almost go down to nothing. And then the other argument is, well, I don’t have that much money to really swing trade equities. This is my way around it. No, I mean, guys, by you saying that, it’s you admitting that you want to trade for big profits and that you’re not content enough just learning the art of trading and letting the profits take care of themselves.

11:39
Trading is commissionless now. So it’s not like I gotta trade options because if I trade equities, I don’t have no big enough of a position and it’ll just eat into my capital that the commissions will. No, that’s not the problem anymore because it’s commission free trading.

11:55
So then the real reason behind it becomes is that you just want bigger profits than what your account should naturally give you. And by naturally, what I’m saying is it’s like you’re trying to force massive amounts of profits out of the market as if you’re trading like a $100,000 portfolio or a $200,000 portfolio, but instead you’re trading an account under $10,000.

12:13
But it’s OK if you want to swing trade Amazon and buy one share of it. There’s no shame in that. There really isn’t. Or if you wanna buy. 10 shares of GME if that’s what you want to do. But I would really try to avoid going to options because you’re just setting yourself up to blow up an account, flag yourself as a pattern day trader would obviously be the better option of the two, but you’re setting yourself up for that as well.

12:39
So there’s a time element, right? As you get closer to your expiration, that premium starts to wear off, so it behooves you to be in the money when you get close to your options expiration. So the time element’s really difficult in options straight and that can be a real pain in the neck.

12:54
But here you’ve got Gator not only dealing with the time element of options, but also the time element is trying to avoid being a pattern day trader. So now he’s putting two variables on himself that the market really doesn’t care about. I hate to say it, the market doesn’t care about your expirations on your options.

13:09
The market’s gonna do what it wants. But the market also doesn’t care about how close you are to becoming a pattern day trader. So when you’re inserting these variables into the market, you’re setting yourself up for disaster because the market doesn’t care about it, but you do. The best thing you can do as a trader is not to have these external elements or variables as part of your trading strategy because ultimately the market doesn’t care about that and just like it doesn’t care about your goals or your desires or your needs or your wants, it’s gonna simply do what it wants.

13:35
But when you start doing that, you’re making trading decisions based off of elements that has no pertinence to the overall market. So often. We will look at the profits that we can make off of the

13:52
So often. We will look at the profits that we can make off of the trade and find that far too enticing for us to care about the risk aspects of the trade.

14:09
So again, I would say that it’s better if you’re going to play these games, it’s better for you to close out those positions and get right up against that pattern day trading rule without going over it. And if you have to wait for 5 days for those day trades to come off of your account, then so be it.

14:25
Because otherwise you’re putting yourself in a situation where you have profits, but you have to choose whether or not you want to be flagged as a traitor or take profit. I wouldn’t want to be in that situation. So for me as a trader, if I’m in this guy’s shoes, I would trade less volatile stocks for one. I get out of the options trading.

14:50
And try to find stocks that have a lower beta. So that I’m not forced to have to choose between, do I get out of the stock for a profit or do I risk losing the profits in order to avoid becoming a pattern day trader? That’s just crazy variables that put into your trading. I just don’t see it as being a long term sustainable approach to trading successfully, because the market doesn’t care about your pattern day trading issues.

15:07
And if you don’t feel like that if you get right up to like the 3 trades and you’re worried about getting that 4th, you feel like that you just can’t put down your mouse. And not make another trade until that passes, so you, you can trade fresh again. Then you have another problem there too is. You need to trade.

15:24
You need the action. And when you need to trade, you need that action, you need that rush, that’s a bad place to be in as well. You should be able to put down the mouse and you should be able to walk away from it and wait until the conditions that you need for successful trading can be met.

15:41
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15:57
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16:15
Also, keep sending me your emails, ryan@shareplanner.com. I do read them and I try to put every one of them into their own episodes. So, I’m not so popular yet with this podcast to where I have far more than what I can utilize. So keep sending me your emails. I appreciate them. I do read them and thank you guys, and God bless.

16:32
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16:53
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17:10
All the best to you and I look forward to trading with you soon.