It has been awhile since I have posted a top ten list, and I have been getting a lot of questions about how to build accounts that are below the PDT balance.
This post are for those traders that are currently under the $25K minimum, and have the goal of getting the account to the point where they can Day Trade.
Short-term trading in non-PDT accounts can frustrating in so many ways. You can have the perfect trade, your position is up over $1,500 and the market/stock are doing everything you expected – except you do not have any Day Trades left and can’t take the profit! So you have no choice but to hold overnight, and naturally, the next morning you awake to find your previously profitable trade is now back to break-even.
There is also that sinking feeling when you are holding a primarily bullish portfolio overnight, and you see S&P Futures dropping….which means chances are there will be a lot of red waiting for you the next morning!
I am sure it can sometimes seem like you can spend months just going in circles and winding up right back where you started. Like I said, frustrating.
Hopefully, this will help a bit:
1) Use Margin – You should be using a margin-account that gives you three Day Trades every five days. To begin with Cash-Settled accounts are extremely limiting – even though they may seem like the opposite. The inability to execute option spreads is primary among those limitations, and with accounts under the PDT rule, option spreads are you best weapon. Another reason? You need to learn how to buy and sell stock – and for that, you want margin. Options are great, but when Day Trading, stock is usually better. And finally, let’s say you have $5,000 – and you buy five calls @ $5 each, and then you trade 250 shares of a $10 stock. Ok, now you are done. One day for half to settle, two days for the other half. How many “day trades” are you really getting that would be of any actual value in increasing your account? Plus, once you Day Trade, you need to know how to use margin.
2) Hedge – You need to learn how to properly hedge your account. Using Relative Strength & Weakness gives you an edge in this regard. Most new traders tend to have a strong bullish bias in their swing-trades, and if you are under $25K than swing trades are your bread & butter. This means that you are generally looking at holding several bullish overnight positions, and also means that if SPY opens down the following day it can do significant damage to your account. Hedging correctly can take some of the sting off these occurrences without sacrificing too much downside. There are different types of hedges you can use:
A) Positional Hedges – Let’s say you are holding Calls on TSLA – Strike Price is $1030, and it cost $20. Before the market closes just turn that call into a Call Debit Spread and sell a higher strike against it. You can do this with all of your calls and/or, especially if they are expiring the same week. You aren’t trying to cap your gains here, so you can make the spread wide – as you are just using the credit to mitigate against time decay for the original long option.
B) Straight Hedge – These are the most effective as a pure hedge, but are only effective at the sacrifice of your other positions. Buying SPY Puts would be an example of this – if SPY drops, chances are your other bullish positions will suffer, but those puts would be the direct beneficiary. This strategy can sometimes be effective if you have a lot of bullish positions.
C) Conditional Hedge – Stocks that are Relatively Weak to the market (e.g. PATH on Friday) are the best candidates for this method. If all of your bullish positions have Relative Strength with solid daily charts, and all of your ‘hedges’ have Relative Weakness with bearish daily charts, then when the market opens down the next day, your bullish stocks should hold up fairly well and your hedges will outperform.
Learn to find the right balance in your account where you don’t want your hedges to cancel out your overall positions, but you also do not want them to be so insignificant that they do not matter.
3) Save One Day Trade For A Lotto – Lotto Friday plays (there is a post dedicated to this) can occasionally pay off like no other type of trade. Take Friday for example – if you had played the TLRY Lotto Calls (I posted these on Twitter) for .04, you could have sold them for .20 – a 500% return. You need a Day Trade available to do that. Some Friday’s will not produce a good lotto play, which is fine, you still have a Day Trade saved that you can use. Plus, Friday Lottos are fun and just because you are under $25K, you should learn them and partake in the opportunity.
4) Stop With The OTM Options – I know, they are cheaper, and you don’t have much money. But with the exception of the beforementioned Lottos (and these should be ATM), they are account-killers. Trust me, 1 ITM Call is better than 4 OTM calls. There is also a post dedicated to this as well (and yes, you should look in the Wiki). I get what you are trying to do, and cognitively it makes sense – you want to buy a bunch of $.80 calls on a strong stock and have it turn into a huge winner. However, you are most likely buying those options that expire the same week (because…cheaper), and when the stock doesn’t move do you sell them for a loss? No. You keep them, and more times than not they whittle away to nothing. Don’t use them. They don’t work, haven’t worked and won’t work.
5) Use Every Tool & Method – Your positions should be a mix of bullish and bearish, spreads and straight options, longs and shorts on stock. Many times you see people with these accounts, and all they have are a bunch of Call Options, which is a recipe for disaster. You want some conservative Bullish Put Spreads, some Put Debit Spreads, straight Calls, Short Stock – a mix of different strategies based on the market and the stock. If all you are doing is looking for “strong” stocks and then buying calls, you are never going to grow your account that way. Spreads, in particular, are your best friend for growing an account. An account with just $5K in it could have done a Bullish Put Spread on RBLX last week (89/88 for .25 cents, expiring 11/19) and within a day made 50% on it. A Put Debit Spread on TSLA would have brought in an even higher amount of profit. Plus, they are safer and give you more avenues to “fix” the trade if it turns against you.
6) Daily Chart – The intraday chart may be what turned you on to a stock, but it is the daily chart that should determine whether or not you take the trade. You are swinging this position and you want to make sure the stock has a decisively good daily direction. You don’t want stock in consolidation or stuck below moving averages, you are looking for stocks that are making strong moves. Also, you need to put the notion that just because a stock is up a lot that it can’t continue. Go with the trend, not against it.
7) Market First – The majority of your positions should be in line with the market. If SPY is bullish, you should not be shorting (unless you are hedging). If the market is undecided, and has low volume, you should be keeping your portfolio to a small size. Unlike Day Trading you are at the mercy of the overnight market, so keep the odds in your favor.
8) Ride/Add Strength – Every morning, the market opens and some of your positions will be up, others will be down. So what do you do? Most people are taking profit on their winners, and quickly. Then they hold on to their losers and watch them all day. You should be doing the opposite – cut most of those losers and ride the winners. This is one of the biggest mistakes short-term swing traders make – getting rid of the positions that are making you money, while keeping the ones draining you of cash. Same thing with the trades you made that same day – if you have a trade that is going really well, stop looking for other trades and just add to the winner – average up. And yes, I know about the fear of the market taking away your gains, guess what? I have a post dedicated to that as well.
9) Stop Over-Thinking It – If you get the market right, and then get the stock right – you will make money. Stop filling up your charts with hundreds of indicators, looking at LVL2 info, volume profiles, RSI, and the rest of that crap. Use the method here to look for strong stocks with relative strength or weakness, and use the right strategy. Do not worry too much about the intraday action unless it violates a significant thesis of your trade. And do not take a major position unless you have a Day Trade left to use in case it goes against you.
10) Make Sure You Are Ready – The one thing you do not want is to finally get above $25K, and then you proceed to blow all your profit. If you are not ready to Day Trade you will find yourself right back below PDT status and trying to build your account back again. When you are swing trading your way up you have plenty of time to practice with a paper account – use that to Day Trade. If you can’t make a profit in a paper account when there are not emotions at play, it is going to be really hard to do it with real money. Day Trading is very different from Swing Trading, and so as you work towards that goal, make sure you are ready for it when you arrive.
Disclaimer: This information is only for educational purposes. Do not make any investment decisions based on the information in this article. Do you own due diligence or consult your financial professional before making any investment decision.