DaytradeTeam Profitzzz
Recaps of DaytradeTeam Trading Systems Performance
Tuesday, August 16, 2005
Trading with Margin
One of the main questions that we are asked at DaytradeTeam is if we recommend using margin to trade with. For beginners who are just getting into the markets, the easy and sure answer is always NO.
Don`t use margin until you have experienced a few gut-wrenching losers (they WILL happen to everyone that trades seriously). Because being able to separate emotion from trading is one of the biggest keys to success, it is simply counterproductive for a new trader to put MORE money at risk, and therefore more emotion.
For more seasoned traders, the answer is not as clear and depends a lot on trading style and personal risk levels. Here is how I handle margin (please note that we recommend keeping separate accounts for separate trading styles):
Swing Trading:
We almost never use margin on overnight positions aside from a few percent to round off the lot (if cash position is $97k I might use $3k margin to make an even 2,000 shares on a $50 stock).
Day Trading:
We are very comfortable with trading in and out during the same day, and we have no problem with using margin to maximize my position power. On the first trade of the day, I rarely use any margin at all -- taking a cash-only position is best until the market finds either a strong trend or established daily range. If the day is range-bound by 11:00-12:00 I may start adding to my position on the established support/resistance levels of the day.
If the day is trending strongly IN MY POSITION`S DIRECTION, we will add to the position on each pullback after a break through support or resistance. EXAMPLE: If we BUY QQQ at 34.00 and the market starts to make new highs at 10:30, 11:05, etc., we will buy and ADD TO MY WINNING POSITION if the stock pulls back after making a new high (if old high was 34.20 and it goes to 34.22, we?ll look to add more on a pullback to 34.17 or so). We DO NOT ADD TO LOSING POSITIONS DURING TRENDING DAYS.
If the day is range-bound (no new market highs or lows after the first hour or so), we will add to my position as it gets near the high or low of the day. EXAMPLE: If we BUY QQQ at 34.00 and it moves up to 34.10, then down to 33.92, then up to 34.09, then we might add to my position at 33.94 again if it hits. IF THE TRADING RANGE IS BROKEN against us, we will exit the position and move on -- if it is broken with us, we will add to position as described in "trending strongly in my direction".
With 4:1 margin access, there are up to 4 times we will have the opportunity to add to my position during a daytrade. We rarely add that many times, and often we will just add in one big lot of 2-3 times our initial position if the stock looks right for it.
Breakout Trades (in late in day for run to close): Don`t save any to add to positions later ? this is a quick trade that has good odds of moving quickly in your favor, so get all that you want from the start. We use 2x margin most of the time for this type of trading.
ALTERNATIVES:
Some people like to trade in the same account that they hold their INVESTMENT (non-traded) stocks in by using the margin buying power to trade stocks actively while leaving the investment shares alone. This can work well and is a good alternative for traders who are just getting started and want to maintain one trading account, but for active traders we?d always suggest separating the accounts.
Don`t use margin until you have experienced a few gut-wrenching losers (they WILL happen to everyone that trades seriously). Because being able to separate emotion from trading is one of the biggest keys to success, it is simply counterproductive for a new trader to put MORE money at risk, and therefore more emotion.
For more seasoned traders, the answer is not as clear and depends a lot on trading style and personal risk levels. Here is how I handle margin (please note that we recommend keeping separate accounts for separate trading styles):
Swing Trading:
We almost never use margin on overnight positions aside from a few percent to round off the lot (if cash position is $97k I might use $3k margin to make an even 2,000 shares on a $50 stock).
Day Trading:
We are very comfortable with trading in and out during the same day, and we have no problem with using margin to maximize my position power. On the first trade of the day, I rarely use any margin at all -- taking a cash-only position is best until the market finds either a strong trend or established daily range. If the day is range-bound by 11:00-12:00 I may start adding to my position on the established support/resistance levels of the day.
If the day is trending strongly IN MY POSITION`S DIRECTION, we will add to the position on each pullback after a break through support or resistance. EXAMPLE: If we BUY QQQ at 34.00 and the market starts to make new highs at 10:30, 11:05, etc., we will buy and ADD TO MY WINNING POSITION if the stock pulls back after making a new high (if old high was 34.20 and it goes to 34.22, we?ll look to add more on a pullback to 34.17 or so). We DO NOT ADD TO LOSING POSITIONS DURING TRENDING DAYS.
If the day is range-bound (no new market highs or lows after the first hour or so), we will add to my position as it gets near the high or low of the day. EXAMPLE: If we BUY QQQ at 34.00 and it moves up to 34.10, then down to 33.92, then up to 34.09, then we might add to my position at 33.94 again if it hits. IF THE TRADING RANGE IS BROKEN against us, we will exit the position and move on -- if it is broken with us, we will add to position as described in "trending strongly in my direction".
With 4:1 margin access, there are up to 4 times we will have the opportunity to add to my position during a daytrade. We rarely add that many times, and often we will just add in one big lot of 2-3 times our initial position if the stock looks right for it.
Breakout Trades (in late in day for run to close): Don`t save any to add to positions later ? this is a quick trade that has good odds of moving quickly in your favor, so get all that you want from the start. We use 2x margin most of the time for this type of trading.
ALTERNATIVES:
Some people like to trade in the same account that they hold their INVESTMENT (non-traded) stocks in by using the margin buying power to trade stocks actively while leaving the investment shares alone. This can work well and is a good alternative for traders who are just getting started and want to maintain one trading account, but for active traders we?d always suggest separating the accounts.
Syndicate Site
