Death Blow to DayTraders

I disagree with p2: of course a small account, one with under 25K, can be profitably traded; however, any intermediate or longer drawdown period is likely to knock the small account holder out of the game.

I agree with p2: the 4:1 margin and elimination of the overnight rule are a boon to traders, and most well welcome it and benefit from it. Of course a small account holder, say with right around the minimum 25K, which uses this leverage unwisely will be knocked out of game as well.

This was, I believe, envisioned politically as something which would protect novice traders from themselves. I think they engineered something just as dangerous with the added disadvantage of placing bogus limitations on markets which should be unfettered with such.

 

For some additional clarification regards the new "$25k" rule:
The following is a question from a customer of IB and a response from the Chairman of IB. This is posted on the IB Web Site: http://www.interactivebrokers.com/html/email/answers/dayTradingRules.html

Q: How will the new rules being imposed by the SROs impact frequent trading?


A: When an account has less than US $25,000 balance, it will not be able to open more than three positions, in stocks only, in any 5 day period. They may trade futures and options or foreign stocks as they please.

- Thomas Peterffy, Chairman, Interactive Brokers Group (7/12/2001)

 

Mr. Peterffy didn't specify whether it was a margin or a cash account. No clarification here. I wonder if he is being purposefully vague?

 

Aldrums,

I'd like to know that myself, since I am now daytrading with an under 25k cash account as I posted before.
I'd also like to agree with your response to candletrader's post:
"The changes are 'OK'. 25k is about right and will save 90% of newbies from being wiped out, by simply preventing them from playing. Also, newbies putting up more than 25k will have an adequate capital base to absorb the learning curve losses, before they turn the corner into success.-candletrader"
you replied:
"On what reasoning do you base this? Traders with accounts that fall Under 25K will not be able to daytrade. If you start with 25K and your first trade is a loss there goes your learning curve.
25K is an arbitrary amount and has no basis in sound reasoning. This is a business where you can literally win or lose an unlimited amount of money. I don't need anybody to save ME from being wiped out, and the size of my trading account is beside the point.-aldrums"

To give a personal example of what you were talking about. I started out daytrading with well over 25k and now I'm down to a little more than half that. You won't hear me whining about it though. I knew the risks and I was willing to take them in the expectation of future success. Now with IB's low commissions and trading in smaller share sizes I am turning that corner, even only being able to go long. But all of a sudden the techniques that I've learned will become obsolete once this ruling goes through. So how am I protected from myself? Now I have the skills that I payed for dearly with the losses I accrued in learning them, only to be "protected" by not being allowed to use them to earn back my initial investment of time and capitol.
I was always told to treat trading as a business so that's what I did. I set aside money to live on while I learned. I treated this and my trading losses as "learning investment" the same way most businesses take a loss in their first year or so until they can become profitable. Sure the ruling may keep unwary trader's who don't know the real risks of trading from being wiped out. But, I can guarantee you that there are many more people like myself who've put in a lot of time, money, and effort to learn to "pattern daytrade" and are now, by some arbitrary 25k limit, up the creek with out a paddle.
It looks like I'll have to change my style of trading to a more swingtrading style, and I'm okay with that because I have a passion for this stuff. But as we all know, changing styles costs money. I'm just irritated that I won't be able to trade the way I've been training to. Hopefully I'll be able to swingtrade myself up to over the 25k and be able to daytrade again. I can see how you folks with over that amount can be happy about the 4-1 and not so quick to get behind this cause. Even I'm somewhat happy about it, looking forward to it. I don't think however, they should have dissed us po folks in the process. It's just not right. I hope this example of mine will help put a face on how this ruling is going to affect a lot of our fellow traders. Thanks for listening- Tailspin

 

A few things.

1. Let's assume for a second that it is true that people with under 25K are being "better served" by the restriction. Since when is it the government's business to be class-based paternalistic? I shouldn't go to Foxwoods Casino either, since gambling is negative expectancy for the most part. But if I feel like blowing my money, that's my decision to make. But imagine if you had to have a certain net worth to gamble! LOL!

I also know there are some posters on this board that support this rule, strangely enough, when they started trading with less than 25K themselves (some of them got most of their money via loan ta boot).

Go to the "my story" thread. You'll have to read for a long time to come across a poster that started trading with more than 25K. But yet all of the posters claim to be successful traders.

The majority of the posters agreeing with this rule, I assume, are not really in favor of paternalism either(if the limit was 250K, or 500K, they'd be screaming to the high heavens about unfairness). I suspect that they have been, simply put, "bought off" with a 4-1 margin bribe. If that's the case, then your integrity is in question.

2. The assumption that you can't trade successfully with under 25K is just stupid -- as the previous poster points out -- and so we don't even have to make the assumption I started with in (1).

Shame on all of you that are supporting this rule from self interest but claiming that it is because you care about "newbies".

Wet

 

I actually think the volume will go up. The game is about larger players moving the market anyway, with one 4 to 1 margin trader making up the volume of many small potatoes.

 

Wet,

i agree with many of your points.. this rule will not affect me now, but it would have prevented me or at least significantly delayed my ability to become a daytrader..

i hope that when the discount brokers see their volume of trades decline, they will ask for the rule to be revised.. it wouldnt suprise me to see the next step in weeding out daytraders to be a requirement to pass the series 7..

liberties are seldom given up all at once.. it is usually a slow erosion justified by the idea of "protecting" people from themselves..

Hitman, i agree.. i think the overall volume will increase at first.. and im looking forward to losing the overnight rule.. but its not fair for smaller players.. the best thing would be to change the margin for over 25k players and still let under 25k accounts trade on 2:1..

-qwik

 

Qwik:

I am totally against the ruling against small players, but there really isn't anything we can do about it so I was just trying to point out the fact that at least for us it is not that bad.

Although yes I do wish the discount brokers can put up something against this ruling, for it will prevent newbies from getting into the market, easier kills

 

Funny how a few days on a winning streak all of a sudden makes you a "newbie killer".

LOL. That's funny.

When the next losing streak arrives, you'll be whining again and singing a different tune again just like you always do.

Wet