Introduction
If you’re a day trader, you know that every platform has its own set of rules when it comes to buying and selling stocks. Robinhood is no exception. In this article, we’ll take a deep dive into the day trading rules on Robinhood, and explain how they work.
What is Day Trading?
Day trading is the practice of buying and selling stocks within the same trading day. The goal is to make a profit by buying low and selling high. Day traders use various strategies to try and maximize their profits, including technical analysis, news analysis, and more.
What are Robinhood’s Day Trading Rules?
Robinhood’s day trading rules are designed to prevent users from making risky trades that could result in large losses. Here’s how they work:
The Pattern Day Trader Rule
The Pattern Day Trader (PDT) rule is a regulation enforced by the Financial Industry Regulatory Authority (FINRA) that requires a trader to have a minimum of $25,000 in their account if they make more than three day trades within a rolling five-day period.
The Good Faith Violation
A Good Faith Violation (GFV) occurs when you buy a stock using unsettled funds and then sell that stock before the funds have settled. If you make multiple GFVs, Robinhood may restrict your account.
The Free Riding Violation
A Free Riding Violation (FRV) occurs when you sell a stock before the funds used to purchase that stock have settled. If you make multiple FRVs, Robinhood may restrict your account.
How to Avoid Day Trading Restrictions on Robinhood
To avoid day trading restrictions on Robinhood, you can:
Trade Less Frequently
If you’re not ready to commit to the $25,000 minimum balance, you can avoid the PDT rule by trading less frequently. Keep in mind that this may limit your ability to make profits.
Use a Cash Account
By using a cash account, you can avoid the PDT rule altogether. However, you will need to wait for funds to settle before making new trades.
Understand Settlement Times
Understanding the settlement times for your trades is critical to avoiding GFVs and FRVs. Robinhood typically takes two business days to settle trades.
Conclusion
Understanding the day trading rules on Robinhood is essential for any trader who wants to make profits without risking account restrictions. By being aware of the PDT rule, GFVs, and FRVs, you can make informed trades and stay within the limits of the platform. Happy trading!