The 3 Trade Rule Explained

Unlike other trading strategies, day trading is short-term because you make many quick trades. Nevertheless, as with all activities in the financial market, there are rules. The 3 trades per week rule is one such condition that requires you to make 3 trades a day or split them through the week. So, what happens if you make four or more trades?

Below, we discuss the 3 trade rule and explain some strategies to help you earn more from limited opportunities.

How to Implement the 3 Trade Rule

When you make more than 3 trades in 5 days, you become a pattern day trader, and some restrictions apply. For example, your margin account balance shouldn’t be under $25,000.

Further, the Financial Industry Regulatory Authority (FINRA) requires your broker to indicate you’re a pattern day trader when day trades account for more than 10% of your activities.

Therefore, one of the ways to work with the 3 trades per week rule is to use a cash account. It lets you make many trades with smaller amounts. Another idea is to have several brokerage accounts. However, running multiple accounts requires more funds.

Pros and Cons of the 3 Trades a Week Rule

One of the benefits of this restriction is you make better trading decisions to avoid losing opportunities. Further, you have better control over your funds because there are few chances to make a profit per week.

The limit on day trades doesn’t mean you’re unlikely to reach your trading target. You can buy or sell stocks, crypto, derivative products, and forex. Consequently, find financial instruments that give you the best returns.

However, this restriction comes with a few disadvantages. For example, you can exhaust the three trades and miss out on unexpected price trends. It also means you can’t invest in all the financial instruments as you choose the most lucrative.

Common Mistakes When Following the 3 Trade Rule

The idea of making quick profits from day trades is enticing. It makes some day traders forget that trading requires a plan. Another weakness, especially for beginners, is unplanned entry and exit, yet they should minimize losses and maximize profits.

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