Margin Trading

Margin Trading

IMPORTANT TO KNOW

Margin trading is trading with leverage; as a rule, every brokerage company offers financial leverage from 1:10 to 1:1000. As profit increases, the probability of losses also increases several times. It is strongly not recommended for the beginners without proper experience and developed risk management strategy.

Traders who prefer intraday trading, sometimes make dozens of deals a day and a bad daily trend can lead to losing their account in a few hours.

There are rules, and they are different for every broker. We are talking about the amount of money that a trader can borrow from the company, the standard is 1 to 4 – this rule is called “Regulation T”. It is valid for day traders. Before you start trading, check the current rules with your broker, as well as check the rules of the country where you are located for any restrictions.

For players with short positions, the risk is less, as they do not leave open positions overnight. Brokers have the right to liquidate the financial leverage, which exceeds the allowed limit for transactions that are left overnight. It is better to check these points with the brokerage company.

Day traders with margin and patterns versus day traders without patterns

Among the intraday players, there are two types – pattern traders, they have higher requirements, for example, the minimum amount in the account should be 25 thousand dollars, and day players without patterns – the requirements are much lower, the starting capital of 2000, for example. Moreover, this amount must always be unconditionally on the account, otherwise trading will be suspended until the account is replenished.

If a trader makes at least four deals per day, such a trader can be called a tattern trader. And it is necessary to show such trading during at least five working days.

One of the following conditions should be met:

– A minimum of 6 percent of trades must be day trades, this for a period of five working days. If you work 4 days a week, then there should be at least 67 non-daily trades. In this case, you are a pattern trader.

– If the trader has two daily orders without satisfaction in three months.

– If the broker sees fit, they will call you a pattern trader.

– if idle for more than 60 days, the account will be downgraded to day trader without patterns.

This set of requirements is mandatory for you to be considered a Pattern Day Trader.

Example: There are 50 thousand in the account, for a margin of 25 thousand, you know that the maximum you can participate in the transaction amount of 100000 dollars (50-25 = 25, 25×4 = 100), remember the rule T, which was mentioned above.

Margin requirements

If the margin amount is exceeded, the company makes a claim against the trader, which is satisfied by a decrease in the price of the securities – the trader’s property. Usually, the trader has five days to satisfy the demands of the broker.

Always keep track of the amount on your balance, as it is not uncommon for margin requirements to be automatically satisfied by selling assets at an undervalued price.

In cases where a player does not comply with the margin call rule, he trades only his balance until all claims are covered.

Suppose you have 30,000USD in excess of your margin requirements and you bought an asset for, say, 140,000USD and you close the trade one day, be prepared to receive a margin warning on the day of the trade or the following date.

The rules described above vary by company, regulator, and country you live in. Always carefully, or better with a lawyer, study all the rules and pitfalls. Check with your broker on any questions you may have.

Risks

You should be aware of all the risks associated with trading with an amount greater than your balance. On the one hand, it offers huge potential for profit, on the other hand, it can lead to significant financial losses. You must have a very proper strategy and risk management system for such trading.

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