I more or less agree with the first few points. If you have doubled your account in the last year, then you ARE successful. One day in the not so distant future, you'll have a few hundred k's in your account, and you'll be able to trade for a living. I would assume that you'd be then in favor of the new rules. As per your last point. Lots of newbies start with much more than 25k, but they still make it in the end, or have higher odds of making it just because they can weather their first losses. The number 1 reason most traders fail is undercapitalization. This arguement will always be between the haves and have not's. So I think the whole thing is pointless. My origional intent was mainly to just say that the gains achieved by those with more than 25k are far more extreme than the losses suffered by the under 25k group with the new rules. The old reg T system needed changing. All that newbies loose is the ability to use margin. It's not the worst thing in the world. Th1 (greg)- I have one monitor on an old laptop, and use datek charting. All the funny indicators always confused me.
P2, First, you've made my point for me. I personally have not doubled my account in the last year. But I've done well. But the point is this: you were ready to admit that a measly 20K could become a few hundred K, since I seemed to have some skills. That's the point. It's not the account size that makes the difference. It is the person trading and their knowledge, risk management, commissions, etc. THAT'S what makes the difference. Does the person have skills? Second, I don't want to trade for a living. I'm a college instructor, and I absolutely love what I do. I'll retire on the day that you have to yank the chalk out of my cold dead hand. So I'm not trading to escape my current career. I'm trading because I happen to enjoy it, and if it makes me some money, that's great too. Third, NO. I would not be in favor of the new rules if I had 25K tomorrow. I'm not a hypocrite. Would the rules benefit me? Sure. But would I support them? No. Fourth, (and this point is getting tiring). Say I make 100K a year. So I fund a 25K account and get a huge drawdown, say 50%. So I refund it. That's your point. This person can "weather" the loss. Ok. Now size analogously. I make 50K a year, and fund a 15K account. I lose 50%. I think I can hack the 7K it will take to refund my account. You act like everyone with less than 25K is on welfare for god's sake. Also, as Def rightly points out, the 4:1 margin for "experienced" traders with above 25K would destroy the guy above making 100K. He has a 25K account with 100K buying power. He wipes out. He's screwed. Fifth, you say "The number 1 reason most traders fail is undercapitalization." If you mean the people that run to Datek with 1K and try to trade it, I agree. But I once again forward this challenge, which has not been taken up by you or anyone else: If I have 15K in my IB account, and IB has low commissions, and I practice money managment and have good setups, WHY am I "marked for failure" because I have less than 25K? I am still waiting to hear a reason. You've mentioned commission costs. I replied by saying that I trade at IB, and IB nullifies that problem. So what's the NEXT reason? I'm still waiting. Sixth, no, newbies lose more than margin. Personally I don't care about margin, since I rarely ever use it. Far as I know, you cannot intraday trade in a cash account (as I said in a previous post). So "newbies" (as you keep calling them) are not pushed INTO cash accounts, they are pushed OUT of the business. Wet
Undercapitalization is the number one reason most traders fail. It takes time to understand the market mechanics. When to buy/sell, how to ride the waves, and feel the roll. How to get filled best. Those are the things that you can never learn while papertrading. You are obviously successful, you'll make it. Most people with 15k at ib will probably not. It's the odds. I've read tons of reports on it. The guy who looses it all on 4:1 margin is really in trouble. The new guy with 30k who margins out is the guy really in trouble, not the smaller trader without margin. I see no way to prevent this. It's a free country, and everyone has the right to make himself bankrupt out of stupidity.
"The new guy with 30k who margins out is the guy really in trouble, not the smaller trader without margin. I see no way to prevent this" I think that's where the fundamental disagreement occurs, at least for me. In a free market defined by the successes of some and the failure of others why are you looking to prevent people from losing their money. I can think of nothing more un-American that limiting access to an open market based on economic standing. Seriously, do you really believe government should and does exist to protect citizens from themselves? Daytraders fail no less often than any other entrepreneurial ventures. Should people aspiring to start a small business be required to bring a specific dollar level to the table or be told to go home? I think not. And as far as your contention that undercapitalized traders are more prone to failure, I think your point is not enough to show a causal relationship. Traders fail because they're not good at trading. If they run out of money before they figure it out they will fail, regardless of whether their account is $5k or $500k. Cheap commissions, online and direct access trading and easily accessible information has opened the markets to more participants than ever. Some will succeed, more will fail. Such is the nature of capitalism but some seem to eager to intervene to limit the failures. There is no reason why a person with $5k at IB can't trade successfully with commissions almost a non issue and real time data feeds available in the $10 range. More and more we are much too willing to limit personal freedom in the name of protecting the individual from him or herself. That is not the role of government nor should it be the SECs. Thats my two cents (unless the SEC says I need more), truthfultrader
def, You said in one of the previous threads that you will find out what does the message on IB site means. The message states that a trader with less than 25K can open only three positions in a five day period.
This seems to be true, and statistics can verify it. But I believe it is an illusion. I think alot of undercapped traders just "apear to fail". Lets say trader joe is really committed to becoming a trader... He opens an account at datek with $10,000. He is new at the game and he blows his account down to 1 or 2k. He closes the account. As far as researchers and statisticians are concerned, they will count this as a "failed trader with low capitilization". In fact p2, I think your old datek account counts as a "failed trader". But trader joe saves up 15k and starts again... This time he opens an account with mytrack and looses about 7k. He also closes that account. Again, statisticians will look at that account as another sorry sap who lost his wad gambling. 3rd tunes a charm. Joe opens a new account with 20k. Joe opened his first account at datek 3 years ago and has learned alot since then, without a great deal of financial harm. (Sure he blew his accounts and was not happy about it, but it was nothing that he couldnt handle) Now joe turns that 20k into 100k. He finds his broker limiting. He opens an account with what he considers to be the best, and funds it with 100k. He never has considerable losses again from that point. He has arrived. Sure there are tons of people who open small account, get smashed and never trade again. They were probably never very committed in the first place. My point is, the account size is not what matters. You can learn with 10 or 15k, and you probably SHOULD! What matters is persistence. How committed are you? How many times will you start anew?
JC I agree with your statement "the account size is not what matters. You can learn with 10 or 15k, and you probably SHOULD! What matters is persistence. How committed are you? How many times will you start anew?" However, your story also relies upon the seeming "inevitability" of almost total wipeout once or twice while a trader is "learning". Let me attempt to counter this, since I disagree. 1. My argument that sub 25K traders can succeed relies upon using a CHEAP broker, not Datek. If you have 10K, a 20 dollar round trip at Datek is 0.20% of your account. So that's your overhead IF you are stupid enough to use all 10K in each trade. If you are smarter and size smaller, you get destroyed by Datek's "cheap" commissions. But you don't have to use Datek. I've repeatedly asserted this. If you have 10K, commissions at IB barely make a dent. A TWO dollar round trip on 100 shares at IB represents 0.02% of your portfolio if you start at 10K -- ten times cheaper than a Datek. So that wipes out the "you'll get eaten alive by commissions" argument, even if you size smaller. 2. A new trader that suffers a 80 or 90% drawdown -- as in your example, is a moron that either (a) has not studied trading in the attempt to find a positive expectancy system or (b) uses no risk management. I suspect that such a fool opens his/her account and THEN begins to learn about charting/positive expectancy systems WHILE they are trading. LOL! A fool and his money are easily parted. Sure, there are things you can only learn "real time" like slippage, emotions, etc. But to learn the basics of technical analysis WHILE trading your money is just plain STUPID. Of course, people that fail to do (a) and/or (b) are not restricted to people with smaller accounts. Stupidity knows no income bracket. I'm sure that there are many idiots with 100K accounts that did the same thing, and lost their shirts. 3. Most of the people included in the "99% of undercapitalized traders fail" are either dummies that failed to do (a) and (b) AND/OR started with a 2K account at Datek and even if practicing (a) and (b) got eaten up by commissions. Both classes are people are completely avoidable by someone with a smaller account -- (1) study trading for a year (that's what I did) before committing a cent to trading, (2) find positive expectancy setups and (3) utilize conservative risk management like it is your religion. Then the chances of you being one of the 99% is extremely reduced. But, again, the same holds for someone with more than 25K. So it's not like this holds for the amount of your trading account. Size stupidly, fail to study the craft, and you will lose your money. Period. So my challenge still stands: Why is a small account doomed to failure and wipeout simply due to having less than 25K? Wet
Wet, So my challenge still stands: Why is a small account doomed to failure and wipeout simply due to having less than 25K? Is it doomed to failure? No. Is it more likely to fail than a better capitalized account? Yes, if it's used for daytrading. Please don't overlook two things: 1. You have taken a slow, studied approach to trading, preparing for over a year! Maybe people who don't do that are idiots and morons, etc. but most don't. Right or wrong, that's the reality. 2. You (for all practical purposes) don't daytrade. Maybe occasionally, but the overwhelming bulk of your methodology is swingtrading. And most of your income is derived from your teaching position. All the reading, preparing, papertrading, and simulation trading in the world will not let a daytrader escape the initial steep learning curve. There are so many expensive lessons to be had, things that could have never been seen in advance, etc. that almost all beginning daytraders have a serious drawdown, despite their best efforts. Despite being careful. Despite their position sizing. Despite their money management. That's just the tuition, and I don't know any fulltime daytrader who has managed to escape it. Not a one. So if you are not well capitalized you don't have the cushion for that initial period that can last from a few months to, literally, a few years. Simple as that. If you start with $15K and you lose half of it (not uncommon), you are not out of the game but you are very limited in your ability to play (besides now needing to make 100% to make up for the 50% that you lost). And it takes many people quite a substantial amount of time (sometimes years) to save and replace that money, even if they are committed. Not everyone can quickly find an alternate well-paying job, not everyone can borrow from mom & dad. And if they are forced to replace lost equity to keep playing, then they're out of the daytrading game until they've built up their nut again. No, small accounts aren't doomed to failure, but if they are used exclusively for daytrading it's not unlikely.
I haven't chimed in here because I think the subject has been beaten to death, but I realized that had this rule been in place since '98 I would not be here today. -In '98 I turned my $15k account into an $8k account in 3 mos. -During '99 I didn't trade my own account -In '00 my new account dipped from $30k to $22k for the first half of the year. It wasn't until June that my trading turned around. As you can see in '98 and '00 my accounts were subject to this rule, and I would have had to find other means to trade such as proprietary firms. IMO the new rule will create these two scenarios, which could increase volatility and decrease liquidity: 1. The small guys will no longer be players, so the spreads will widen creating more slippage costs. 2. Due to decimalization volatility has lessened around the inside prices because the price levels are so thick now. For scalpers this has made trading more difficult. These price levels will lighten up come September which will be a positive for scalpers like myself. There's nothing more frustrating than getting in for a scalp that should provide a .3-.5 move when you are on the right side of the futs, but it only moves a dime because the levels are too thick.
Dustin, but I realized that had this rule been in place since '98 I would not be here today. I am firmly against the rule as I've stated on a number of occasions, so please don't interpret my comments above as support for this latest government insanity. And, of course, many people will recover the initial drawdown by halting their daytrading, maybe switching to swingtrading, definitely trying to add funds to the account by whatever means. But in the meantime, for most cases, they are out of the daytrading game because of that lack of cushion. That's all I was trying to say.