Using Margin for day trading

Discussion in 'Risk Management' started by DuyLe, Nov 2, 2007.

  1. DuyLe


    Hi, i am a new trader. Any recommendations for using margin? I am starting out with 100k. I plan on setting up a long term portfolio while at the same time day trading. I get 2-1 for my long positions and 4-1 for intraday. Any suggestions on how I should use margin for starting out and then expanding as I become more accustomed?

  2. lindq


    I'm very supportive of having two long term and one for short that has always worked well for me.

    Regarding margin for daytrading, IF (repeat, IF), you are consistently profitable, and IF you are going to close all positions at EOD, then use of margin is a great tool. In most cases, you will also earn interest on your unused cash overnight in addition to your trading profits.

    However, if you are new, or are not yet consistently profitable, then margin should be off limits to you, as it will simply accelerate your losses.

    This is not a game you will learn in months. You will master it over the years, IF you protect your capital. Out of money, and you will be out of business.

    You single objective starting out must be to maintain your capital while learning, because 100K can go very quickly unless you are ruthless with yourself in maintaining discipline, and developing systems that work before you start putting serious money into them.

    Do not for a second ever underestimate the ability of the market to take your money. It is designed to do so, because the house has the edge, and there are thousands of other traders like me ready to take your dollars. You must protect them with every trade, and not put anything on the table until you are sure of what you're doing.

    Good luck.
  3. If your new, and I assume you are, DON'T touch margin. Your 100k will be gone before you even know it. I suggest you stick 75k in a money market account and take 25k which is the minimum to trade and open up an account with a broker. Trade the smallest possible size (100 shares) until your making consistent profits. By that time you can start using margin, slowly. Good luck.
  4. If you have enough $ to trade without margin then I'd not use it at all. It's so stress relieving.

    aka Cajun Sniper
  5. Do you mean that one should never short stocks?
  6. I have been trading futures and forex with no use of leverage for a long time, I don't make a lot but I enjoy my trading and I sleep well.

  7. Good advice. Start small. Your goal should be to build a trading stake with "the house's money."
  8. NoDoji


    I'm still in my first year trading, made some really dumb mistakes, never dipped into my day trading margin, and have averaged $750 a week this year on a $60K account.

    Nobody here can tell you enough times the value of managing your money. Josh Lukeman's book "The Market Maker's Edge" has superb opening chapters on position size and risk management.

    I will tell you this from experience: If you always put in a stop at a max loss that's a very, very tiny % of your account, and you never move that stop EXCEPT in your favor, you can spend quite a bit of time making bad trades and still stay in the game. Armed with this kind of discipline, if you develop even a small edge, you will be profitable without using margin. As another poster here said, only once you are extremely consistent and disciplined on EVERY trade for an extended period of time, should you consider using margin.

    Learn to love losses as long as they are a lot smaller than your gains. If you can take a loss and consider it a win ("I saved myself $500 by taking that $200 loss instead of waiting for my trade to turn around."), then you have a great chance of making it.

    One of the biggest killers of accounts is your personal beliefs about price. The market is ALWAYS right. There is no such thing as "too high" or "too low" for a stock or index. Say you shorted 500 shares of GMCR @ the YTD high of 55.67 late April after it made new 52-week highs day after day between March and the end of April, had gained over 140% since November, and had a P/E ratio that was quite bloated. What did your account look like the morning of April 30th? If you managed to get out right at the open, you were only down $3100. But if you held your position for even 5 minutes that morning, the smallest loss you could've got away with was $7000. And if you kept thinking it would certainly come back down in a few days, the smallest loss you would've managed since was $10,300. Still holding and hoping as of yesterday? -$17,800

    Suppose you used your 2:1 overnight margin and held 3000 shares short because this was gonna be a home run, and you held the position for 5 minutes that morning hoping for a reversal. Your $100K account would be nearly cut in half. Many years ago an acquaintance of mine was doing well day trading and he started using his 2:1 overnight margin to swing for the fences. He held some huge positions on margin while he went on vacation in October of 1987. Black Monday wiped out his entire net worth. He lost everything.

    As a new trader, avoid using margin, you won't need it with a $100K account, even if you're trading for a living. Work on getting a ton of screen time so you learn to recognize the footprints left behind by the crowd. Soon you'll get to the point where, when you see those footprints, you'll have a good idea of where the crowd is headed next. This will be your trading "edge". Combine that with absolute discipline and you will succeed.

    You can find an excellent example here of a great trader who's had more losses than wins this year and who's account is up 35% YTD based on absolute unshakable discipline, a very simple strategy for entries, and a 2:1 reward/risk ratio:

    Best of trading to you!
    #10     Jun 6, 2009