What Is A Good Faith Violation?

Trading in a cash account comes with a few settlement rules that are easy to overlook. One of the most common issues for new investors is the good faith violation. This rule centers on how and when trade proceeds become usable. Settlement timing matters because the cash in your account may show as available, but it is not always fully settled and ready to reuse.

A good faith violation happens when you use unsettled funds to buy a security and then sell that new position before the original trade has settled. Knowing how settlement timing works may help you avoid good faith violations and keep your trading activity unrestricted.

Settled vs. Unsettled Cash

If you trade using a cash account, you might notice two types of balances: settled cash and unsettled cash. These terms affect what you can safely do with your funds and how to avoid triggering a good faith violation.

Settled cash includes:

Unsettled cash refers to money from securities you’ve sold, but that has not yet reached the settlement date. This balance appears available right after a trade, but it is still moving through the clearing process behind the scenes.

You can use unsettled cash to open new positions. However, if you sell those new positions before the original trade settles, it may lead to a good faith violation.

How Long Does It Take for Funds to Settle?

Most equity trades in the U.S. follow a T+1 settlement schedule. This means the transaction settles one business day after the trade date.

✏️ Hypothetical Example:

This T+1 timing applies to most stocks, many bonds, options, and U.S. government securities.

Although trades are executed immediately, the money from a sale remains unsettled until the next business day. That’s why it is important to track which funds are fully settled, especially if you plan to enter and exit new positions quickly.

How a Good Faith Violation Works (With Examples)

Good faith violations are easy to trigger if you are trading in a cash account without tracking which funds are fully settled. The rule can feel confusing at first, but it follows a consistent logic: you should not sell a security purchased with unsettled funds until the original trade has settled.

Below are three scenarios that show how this can happen.

Scenario 1: Selling a Position Bought With Unsettled Funds

You sell $1,000 of Stock A on Monday and immediately use that money to buy $1,000 of Stock B the same day.

On Tuesday, you decide to sell Stock B.

This creates a good faith violation. The funds from the Stock A sale do not settle until Tuesday, so when you sold Stock B, the money you used to buy it was still unsettled.

Scenario 2: Reusing Settled Funds Too Soon

You start with $5,000 in settled cash. On Monday, you buy Stock A for $5,000, then sell it the same day for $6,000, making a $1,000 gain.

So far, this is fine. Your original purchase used settled funds.

But then, you decide to buy back $5,000 of Stock A again before the market closes on Monday.

On Tuesday, you sell that second position.

This trade now does result in a good faith violation. After the first round-trip, the original $5,000 is treated as unsettled. Selling the second position the next day uses cash that has not yet settled.

To avoid this, you would need to wait until Tuesday to sell that second position so the first trade has time to settle.

Scenario 3: Mixing Settled and Unsettled Funds

You have $5,000 in settled cash in your account. You then sell another stock, Stock A, for $5,000, creating an additional $5,000 of unsettled funds.

Later that same day (Monday), you buy $10,000 of Stock B using the full balance of both settled and unsettled cash.

On Tuesday, you sell all 200 shares of Stock B.

This would result in a good faith violation, because half the purchase was made with unsettled funds from the Stock A sale.

However, if you only sell 100 shares of Stock B, the trade would not trigger a violation. That portion was bought using the $5,000 in settled cash already in your account.

Penalties for Good Faith Violations

Most brokers do not impose immediate restrictions after your first good faith violation. Instead, the first and second violations typically result in account warnings. These serve as a reminder to follow settlement rules and avoid trading with unsettled funds.

If you receive three good faith violations within a 12-month period, your cash account will likely be restricted for 90 calendar days. During this restriction period, you can only place new trades using fully settled cash.

This means:

Restrictions are applied at the account level, and they remain in place even if your balance increases. To restore full trading flexibility, you’ll need to wait out the 90-day restriction or contact your broker to explore your options.

How to Avoid Good Faith Violations

The most reliable way to avoid a good faith violation is to trade only with settled funds in your cash account. This means placing buy orders using money that has fully cleared the T+1 settlement process.

You can check your available settled cash by looking for the balance labeled “available for withdrawal” in your brokerage account. That number reflects what is fully settled and safe to use without restrictions.

If you do choose to trade with unsettled funds, you’ll need to wait at least one business day (until the original trade settles) before selling the new position. Selling too soon is what triggers the violation.

📌 Also read: What Is A Freeriding Violation?

Final Thoughts

Good faith violations are easy to overlook but may lead to temporary account restrictions if repeated. These rules are specific to cash accounts and are based on when your funds are considered fully settled.

To avoid potential issues, it may help to monitor your settled cash balance before placing trades, especially if you plan to enter and exit positions quickly. Using only settled funds or waiting until trades have cleared before selling can reduce the risk of triggering a violation.

If you are unsure about how your brokerage tracks settlement or flags violations, review your account settings or contact their support team for details about their specific policies. 

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