Day Trading Money Management –

Traders have two main options for their accounts: margin vs. cash. When deciding to choose a margin account vs. cash account, there are many factors to consider. In this TradingSim article, I’ll explain the difference between a margin vs. cash account. I’ll also write about how experienced day traders or people who are new to investing can choose the best account for them to have the best trading strategy.

What is a margin account?

If an investor is investing on their own, they may have limited funds. If they need more money, they can deposit cash and a brokerage firm can loan them money, too. That’s leveraged investing for traders. In a margin account, day traders can borrow money to fund their accounts. It’s similar to using credit cards to make purchases when a card company extends credit to a customer.

Ali Hashemian is president of Kinetic Financial. He likens buying stocks on margin to buying a house.

“Using margin to buy stocks is similar to using a mortgage to buy a house. In both instances, investors borrow money to purchase more equity in stocks or real estate,” said Hashemian.

What do brokers like Robinhood charge to trade on margin?

When traders are trading on margin, they’re charged interest on a margin interest loan. In the popular Robinhood app, users are required to have $2,000 in their accounts before they can trade on margin.

In Robinhood’s $5 monthly fee, the first $1,000 of margin is included. If traders borrow more than $1,000, they pay 5% interest on the leveraged investing. For example, if a trader uses $3,000 of margin, they’re charged a daily interest rate of 5% divided by 360 for each day of the trading year.

In that case, $1,000 is deducted from the $3,000. The remaining $2,000 has interest added on to that amount. Then, it’s $2,000 x 5%/360= $0.28 daily interest. While Robinhood charges 5% interest, each brokerage firm has its own interest and may be significantly higher. Investors should check margin interest rates with their firms.

What are the rules for a margin account?

Before an investors trades on margin, there are some rules a trader must follow. When an investor trades on margin, the Financial Industry Regulatory Authority(FINRA) that regulates trade has requirements. FINRA mandates that a trader must have either $2,000 in their account or 100% of the stock purchase prices.

Once a trader has $2,000 in their account, they can trade 50% of the securities they’re going to purchase. For example, if a trader has $2,000 in a margin account, they can buy $4,000 worth of stocks on margin.

Apple stock can be bought with margin account vs. cash account

After a trader buys an asset on margin, they have to maintain a certain balance in their accounts. A trader has to outright own 25% of assets in their accounts.

A brokerage firm may also ask for a trader’s net worth and income. In addition, a firm may conduct a credit check before an investor can trade on margin.

What are the advantages of a margin account?

If traders need to trade on margin, there are some benefits. There is a potential to profit from trades. For example, a person buys shares of Apple stock for $100,000 with a mix of $50,000 cash and $50,000 margin. If you sell the stock for $125,000, the trader has a $25,000 profit.

If a trader borrows on margin, they can have a brokerage firm give them extra leverage to make larger trades.

Scott Bishop is a certified financial planner with STA Wealth Management. He noted that buying on margin can help investors who need extra financial assistance.

“The margin can almost be like an overdraft line of credit,” said Bishop.

Margin can help bring more investors into trading

Bloomberg writer Nir Kaissar notes that Robinhood is helping more investors get into the stock market with its Robinhood Gold plan.

“One of the things I love about Robinhood is it’s … drawn millions of new people into the market. If we want people to become more savvy about personal finance and investing — and I think we generally say that we do — then I think they need to have the experience of being an investor. I don’t think those are things that you can necessarily learn just in a textbook,” wrote Kaissar.

A Robinhood spokesperson said that the platform is helpful to new investors.

“We believe that broader participation in the markets is more democratic and can bring opportunities to many. Those who dismiss retail investors as ‘gamblers’ or ‘gamers’ perpetuate the myth that investing is only for the wealthy and highly educated,” said the Robinhood spokesperson.

Some financial advisors say margin wins in margin vs. cash accounts

Colby Davis is portfolio analyst for RHS Financial in San Francisco. He encourages clients to buy stocks on margin if they’re pressed for cash.

“We generally encourage [margin accounts] with our clients even if we don’t plan to do leveraged investing with them. Sometimes a client needs money in a hurry, and instead of having to sell securities and wait two days, you can take the money out immediately and sell the securities the next day or the next week. You don’t have to wait as long to get the cash out,” said Davis.

“If you really want to buy an investment and you don’t have the cash instantly available, it’s a quick way to make sure that you have it,” added Davis.

In addition to that benefit, buying stocks on margin can give investors more time to repay the loans. A brokerage firm gives a trader extra time to repay a margin loan. An investor can repay a loan whenever they can as long as they maintain a margin account balance.

Trading on margin better for experienced traders

For some experienced traders, trading on margin can be effective. Tom Watts is the chairman of Watts Capital Partners. He advises that traders use margin if they’re experienced traders and have extra money. The margin can be used for those traders as an emergency fund for transactions.

“For most of our clients, we like to have a margin account even if they never buy stocks on margin because they can transfer money faster,” said Watts.

“With a margin account, they don’t have to wait: They can access cash instantly,” added Watts.

Watts also recommends margin trading if you have time to actively trade and stop losses to limit trading mistakes.

“If you’re in front of your terminal every day, you have strict loss limits and you have a trader mentality, margin investing can be a great thing in up markets. But investors should only do it when the market is going to keep going up and have very strict loss limits,” said Watts.

Buying stocks on margin can postpone capital gains taxes

Nate Wenner is a certified financial planner with Wipfli Financial Advisors. He notes that margin loans let investors postpone paying capital gains taxes. If investors need to make a large purchase, selling investments would lead to capital gains taxes. When traders buy stocks on margin, they can postpone capital gains taxes.

“By taking a margin loan, [you] don’t have any transactions and there’s no tax recognized. In most cases, our clients don’t keep this margin loan for months and years on end…They try to pay it back when they have the cash flow, maybe from a bonus at work,” said Wenner.

In addition to that tax advantage, the interest on a margin loan may be tax-deductible under certain circumstances.

Forex trading on margin is most common

While margin can used for regular stock trades, forex (foreign exchange) margin is the most generous.

Peter Klink is the director of risk management at TD Ameritrade. He said that forex rules gives investors the most leverage.

‘Generally, forex rules allow for the most leverage, followed by futures, then equities. Depending on the product, forex and futures leverage can be at 20:1 or even 50:1 compared to equities’ overnight margin of 4:1,” said Klink.

Adam Hickerson is a senior manager of futures and forex at TD Ameritrade. He noted that the volatility of forex makes it ideal to trade on margin.

“Geopolitical tensions, economic news, central bank policy decisions … a multitude of things move the forex market every day, and so there are several different reasons to consider using margin in forex trading,” said Hickerson.

“Currency prices change every day, meaning margin requirements for forex positions may also change every day. It’s important to understand that if the base currency is anything other than the U.S. dollar, the margin requirement is going to fluctuate on a real-time basis as the price of the base currency changes relative to the U.S. dollar,” added Henderson.

What are the disadvantages of a margin account?

While there are advantages to having a margin account, there are drawbacks as well. Scott Bishop is a certified financial planner with STA Wealth Management. He advises against traders, especially new investors, from buying stocks on margin because investors may be too emotional and trade too quickly.

“Should the average investor buy stock on margin?” asked Bishop. “No, because the average investor buys on greed and sells on fear,” said Bishop.

Timothy Hooker is a co-founder and accredited investment fiduciary at Dynamic Wealth Solutions. He commented that experienced traders can trade on margin with minimal risk. However, too much leveraged investing can be dangerous.

“If you’re an experienced trader and know what you’re doing, there’s nothing wrong with using margin. But if you’re really trying to take your account to the moon and back, then that’s where you can blow up your account and really derail your financial plan,” said Hooker.

John Person is the founder of Persons Planet, a trading education and advisory service company. He advises investors not to borrow more than 25% from their accounts to buy stocks on margin.

“A small amount of your portfolio can be used to extract cash for small loans. Borrowing more than 25% of your total portfolio is ludicrous because the market can go down,” said Person.

High interest rates can cause problems for margin accounts

Brian Cody is a certified financial planner with Prudent Financial. He noted that margin interest rates are often higher than for other kinds of debt.

“Interest rates on margin loans quite consistently seem to be 3% or 4% higher than what you would get for a home equity line or some other reasonable type of debt,” said Cody.

Colby Davis is a portfolio analyst for RHS Financial. He cautions traders not to use too much leverage investment before stocks lose value.

“Anything you buy can go down in value, so when you buy investments on margin, you’re exposed to more risks because you have liability in terms of the cash you’re borrowing. You have to make sure your investments don’t lose so much value that you lose more than what you owe,” said Davis.

What do financial experts say about trading on margin?

Many financial experts advise traders to buy stocks on margin with a high rate of return. S. Michael Sury is a lecturer of finance at the University of Texas at Austin. He advocates that traders invest in assets with high returns if they’re trading on margin.

“Take an investment that offers an expected return of 15 percent, but with actual results that might range between 15 percent and 30 percent,” said Sury. “Even if the cost of borrowing is low, say 4 percent, the transaction is very risky.

“On the other hand, if a collection of diversified investments can offer a 10 percent rate of return with a narrower range of 9 percent to 11 percent, then the risk of the transaction has been dramatically reduced,” added Sury.

Expert investor Warren Buffett also has a warning for traders who are practicing leveraged investing.

“When leverage works, it magnifies your gains … but leverage is addictive. Once having profited from its wonders, very few people retreat to more conservative practices,” said Bufffett.

Financial expert Lyn Alden also said that traders should be experts in the industry they’re investing in before they trade on margin.

If you understand your industry and you’re trading something of value, you should be able to use debt to trade more,” said Alden.

“These types of ‘good debt’ give far lower interest rates for people with good credit than the typical margin rates offered by brokers,” added Alden.

Tesla margin requirements impact investors

As Tesla raised its margin requirement from 55 to 79%, there have been consequences for investors. Tesla’s margin requirement is the amount of cash a trader has in their account instead of credit.

Tesla stock has margin trading requirement

Benzinga founder and CEO Jason Raznick noted that he was notified about having to sell his Tesla shares.

“A lot of people that got this message yesterday had to sell shares. Multiple people I talked to overnight were forced to liquidate Tesla shares. Multiple people. And these are people who were positive, up on Tesla, and they had to sell by the close yesterday,” said Raznick.

“This is happening because large institutions are buying shares of Tesla, and brokerage firms want to free up shares to sell these large institutions,” added Raznick.

Raznick said that traders are selling Tesla stock because of their margin.

“There are people selling this stock right now not because they want to, not because they have bad fundamentals; they are being forced to. Including myself and including some others, we are forced to sell stock because of the margin we have on it, and I do believe that represents a potential long-term trading opportunity,” said Raznick.

Investors shouldn’t buy too many stocks on margin, experts warn

Davis also advises traders not to buy stocks regularly on margin.

‘I would only recommend using a margin account for the purpose of having additional flexibility on when you can withdraw cash. But I wouldn’t recommend having a margin account to invest as part of their strategic plan unless they’re working with a sophisticated financial advisor or are a sophisticated investor themselves,” said Davis.

Ali Hashemian says that investors can buy more stocks on margin in a bear market. However, he warns that traders not to buy too many shares on margin when the stock market is down.

“An investor might want to use margin to purchase more shares in a down market. The problem is that nobody can predict the bottom,” said Hashemian.

Jose Remy is a partner at Alvarium Investments. He says investors should only trade on margin if they expect great returns on their investments.

“This should be done when the expected return of the investment being made is greater than the cost of leverage. And when the risk profile of the investment and the client’s overall portfolio is commensurate with his or her risk tolerance,” said Remy.

Financial advisers advise traders to borrow on margin carefully

Many young investors are flocking to trading on margin. Chris Larkin is managing director of trading and investment product at E-Trade Financial.

When it comes to Millennials and Gen Z investors, time is on their side, but that doesn’t mean they can be complacent or act emotionally,” said Larkin.

“Access to the market has never been easier, so investors just embarking on trading should walk before they run. A thoughtful and disciplined approach is key—do your research, set up watch lists, and align your trading strategy with your goals and risk tolerance,” added Larkin.

Borrowing on margin can also create problems, like being on margin call.

What happens when an account is on margin call?

When an account is on margin call, a trader is in trouble. If a trader hasn’t maintained a minimum balance of 25% outright owned assets in their account, they’re put on margin call.

Margin call is when maintenance margin falls below a certain limit

Nate Wenner is a certified financial planner. He notes the danger of trading on margin if investors can’t maintain their margin account balances.

“This makes it a dangerous game to play,” said Wenner.

For example, a trader wants to invest $150,000 in a stock whose shares are $100. A trader invests $25,000 and borrows the rest on margin. A brokerage firm can then institute a 30% margin maintenance on their accounts.

If shares fall to $70, a trader’s margin can fall down to $87,000. That amount may be above the margin maintenance threshold. However, if the stock keeps falling and the margin maintenance account drops to below the 30% threshold, the trader is placed on margin call.

Will margin accounts be in more danger after the quarantine?

Christopher Gerold is president of the North American Securities Administrators Association. He noted that the increase in trading during the quarantine will lead to more margin calls on traders.

‘In the coming weeks, I expect that we will see a significant increase in complaints related to suitability, specifically use of margin in retail accounts. I expect many will have been unsuitable and will require investigations by regulators,” said Gerrold.

Gerrold also noted that more staff will be needed to deal with margin call accounts.

“Processes, procedures, and staff must be in place so that investors can reach their financial professional to ask questions, raise concerns, and discuss investment options. We’ve heard–and these have been very public–about trading delays and crashes of electronic systems at some of the largest broker-dealers in the last couple weeks,” said Gerrold.

What should investors do when they’re on margin call?

If an investor is on margin call, then an investor has to take action. A trader has to have deposit funds to meet the margin minimum, usually within three business days. If a trader doesn’t have the funds right away, they may have to sell stocks in order to meet the margin minimum. Firms may also totally liquidate a trader’s account if they can’t pay off their margin call.

If a trader can’t pay the margin call, a brokerage firm may have to report your debt to a credit agency. A trader’s credit could be negatively impacted for a long time.

How can an investor avoid margin call?

There are ways for investors to avoid margin call. If an investor is able, they should have an emergency fund on hand in case there is a margin call. A trader should also be knowledgable about the margin requirements before buying stocks on margin. In addition to those measures, traders can use stop-loss measures to prevent themselves from plunging into debt. With stop-loss measures, traders can limit their margin losses.

As TradingSim’s own Al Hill told Mint, traders shouldn’t use all of their margin when buying individual stocks. Only a small percentage is best fro each individual trade, especially for beginning investors.

“Only use 10 percent of your margin. For example, if you have $100k cash, which would afford you $400k in margin, only use $40k on any one position”, said Hill.

Where do investors trade on margin?

Some investors have personal accounts of trading on margin. In one example, Zaki Ahmed trades with Oanda. He uses a lot of leveraged investing when he makes trades.

“Oanda recommends a moderate leverage amount of 20 to 1 or lower. My leverage is almost 50 to 1,” said Ahmed.

While Ahmed trades on margin, he admits that it’s wreaked havoc on his finances.

“I’ve been through the ringer in terms of all manner of investment and gambling. To be honest, I regret that I’m doing this now. I won’t tell you how much I’ve lost but it’s in the thousands,” said Ahmed.

If traders want to trade on margin, they have to exercise a lot of caution and be prepared for losses.

How can investors trade with a cash account?

If trading on margin is too risky, investors can trade using cash accounts. In cash accounts, investors can simply buy stocks with their available cash. For instance, if a trader has $1,000 in an account, they can only buy $1,000 worth of stocks.

What is the difference between a margin account vs. cash account?

While a trader can trade right away by borrowing on margin, having a cash account requires an investor to have more patience.

Brandon Herman is the senior manager of margins clearing at TD Ameritrade. He commented on the differences between the two different kinds of accounts.

“In a cash account, if you buy and you sell, you have to wait for that sale to settle before you can use the funds again. Some clients may find it worthwhile to use a margin account every now and then to be able to buy what they want to buy, when they want to buy it, and borrow with margin for a short period of time,” said Herman.

What are the benefits of using cash accounts?

In contrast to margin trading, cash accounts are a one-time investment. Patrick Lach is a certified financial planner and assistant professor of finance at Indiana University. He noted that investing on margin requires extra cash to maintain an account. On the other hand, cash accounts don’t have that requirement.

“This is a major risk of margin investing. It may require the investor to come up with additional cash to maintain the position. This is not an issue with cash accounts—they only require a one-time, up-front investment of cash,” said Lach.

He also noted that when there is a margin call, investments have to be sold and lose value quickly. However, Lach noted that with a cash account, investors have time to recover from their losses with cash accounts.

“With a cash account, the investor has the luxury of waiting for a stock to recover in price before selling at a loss,” said Lach.

What are the disadvantages of a cash account?

While there are advantages to having a margin account, there are drawbacks as well. If a trader wants to trade in a hurry, they’re unable to with a cash account. Cash must settle before a trade officially takes place.

For instance, if a trader uses $500 in their account to make a trade on Monday, they can’t make a trade with that same $500 until Thursday at the earliest. That delay is called a settlement and is part of the transfer of assets to a buyer’s account and cash to a seller’s account.

Another problem with cash accounts is having good faith violations. A good faith violation is when investors make trades before cash has settled. If traders make these violations three or four times, they can put into a 90-day trading restriction.

Facebook stock a popular stock to trade in margin vs. cash account

Dan Merritt, manager of margin risk at TD Ameritrade, advises investors to exercise caution before having good faith violations.

“It’s not like there’s a lot of wiggle room for exceptions, so it’s best to know how to stay on the right side of the regulations,” he said.

Merritt also advises traders to call their brokerage firms before they reach the 90-day trading restriction limit.

“If you call us after you do something, it’s harder for us to assist you, so calling us and asking what will happen in a situation is sometimes better. That way we can walk you through all of your choices at that point,” said Merritt.

What other violations can jeopardize a cash account?

In addition to good faith violations, free riding violations can hinder a cash account. Freeriding occurs when a trader tries to buy or sell a stock without depositing enough funds before settlement. One way to have a free riding violation is to use the same capital on the same day on two separate trades. A trader can buy a security and sells it before settling the first purchase.

For example, a trader has 500 shares of Ford (NYSE:F) with shares at $20 on Thursday. A trader needs $10,000 to settle the transaction. On Friday, Ford’s stock rises to $25. As a result, the trader earns $25,000. However, if a trader didn’t settle the original trade without the new sale’s profits. If an investor can’t settle the first trade, then the trader is freeriding.

If a trader is freeriding, a brokerage firm can freeze a trader’s account for 90 days. In the middle of the freeze, a trader can use a cash account to make trades. However, a trader has to settle all purchases on the trade date.

How to cash in a margin account

In a margin vs. cash account, cashing in a margin account takes certain steps. A trader can close their account and completely cash out their margin accounts. First, an investor has to sell their investments. Then, a trader has to make sure their margin loan balance is at zero. Then, an investor has to close the officially close the account through a broker.

If an investor wants to cash out their margin loan balance, there are steps that traders can take. They can request a cash withdrawal with available funds minus the margin loan amount. Once the cash is withdrawn, a trader can make sure the money is transferred to another account. Then, an investor’s brokerage margin account shows the next margin loan balance.

Which account wins in margin vs. cash account?

When choosing between a margin vs. cash account, a trader has to make many considerations. If a trader wants to day trade often without fear of pattern day trader status, a cash account may be best. A cash account may also be best for traders who have the patience to wait until their settlement period of two or three days.

If a trader wants to trade right away but has limited funds, margin trading may be best for them. Also, if a trader wants to trade volatile and high-risk assets like forex, margin trading may be their best option.

Ultimately, a trader has to make the best decision for them about deciding between a margin vs. cash account.

Regardless of which account a trader uses, TradingSim can help traders whether they choose a margin vs. cash account. With TradingSim’s blogs and charts, traders can find the best accounts for them to potentially increase their profits.

Working from home during the COVID-19 pandemic

Day trading stocks can be a successful way to create income- but it’s not easy. Many people want to make a profit in this bear market, but there are many challenges that day traders face in the COVID-19 era. This TradingSim article will explore how the real benefits and costs of being a day trader. The article will also teach day traders how to trade stocks from home and help them find the best strategies and stock picks to become a successful trader.

How do you get started day trading part-time?

Day trading involves quickly trading securities several times a day. Traders buy and sell stocks often throughout a trading day to make a quick profit. Volatility in the stock market helps day traders make a larger profit. However, stock fluctuations can backfire if a trader trades too hastily or makes a bad trade.

When is the best time to trade?

The best time to day trading is at the start of the day at 9:30 AM EST. The first hour of the trading day can be the most pivotal because there is more liquidity, when there is a higher volume of trading in the first trading hour. and there is the most volatility at the start of the trading day.

The other ideal time to day trade stocks is at the end of the trading day from 3 PM-4PM EST. Just as at the beginning of the trading day, high volatility at the end of the day can help day traders maximize profits.

What is a good day trading strategy?

Before traders get serious about day trading, they have to make some important decisions. Here are some things to consider before they start day trading stock strategy.

Determine whether you have the time and patience to day trade. Day trading is not a hobby. It’s a time-consuming job that takes up hours of a trader’s day. Even though day trading moves fast, a lot of methodical thinking is required to day trade stocks. Day traders also need excellent math skills, risk-taking abilities, and discipline to study the changes in the stock market.
Study the stock market. Day traders need to diligently study the stock market to be a successful trader. Traders have to possess a wide range of financial knowledge to withstand the ups and downs of the Dow Jones and NASDAQ. It can take years to master the stock market, so studying the nuances of the market is essential.
Study the different securities to trade. Day traders not only trade stocks. Traders have to research ETFs, foreign currency, or other assets to trade if they want to branch out beyond stocks. Novice traders may not realize that there are different rules and strategies for various assets.
Practice trading with simulated trading. Before traders risk their own capital, they should test their trading strategies. TradingSim would be a perfect outlet for traders to try out simulated trades before they decide to risk real money in the markets.
Start small, then expand. Once a trader has the capital, they should still slowly delve into trading stocks. Day traders should start small to minimize risk. If a day trader suffers losses, it won’t be as devastating if there is less money on the line. When a trader experiences success after three months, they can incrementally put more money into the markets. If they are still struggling after 90 days, they should maintain or even decrease the amount they have invested.

How much money do day traders need to start?

While there is no set amount to start day trading stocks, there is an amount that should be sufficient to weather the unpredictability of the stock market. When a day trader is ready to invest, they must have a lot of money saved to quickly buy and sell shares.

A trader should have at least $10,000 in disposable income ready to invest in the stock market. The Securities Exchange Commission notes that ideally, a day trader should have at least $25,000 in their day trading accounts. If a potential trader can’t afford to risk that much capital to withstand market volatility, they aren’t ready to day trade stocks.

A beginning day trader’s account also depends on what asset is being sold. To buy stocks, a trader needs at least $25,000. However, for day trading futures, $10,000 is recommended. For trading forex, $100 is likely the lowest amount needed. No matter what asset day traders buy and sell, all traders shouldn’t risk more than 1% of their trading income on one trade. For instance, if a day trader has $25,000 in their account, they should risk more than $2,500 on a single trade.

What equipment does a day trader need to work from home?

In order to treat day trading stocks like a work-from-home business, a day trader needs the right equipment. Traders should invest in a trading machine and trading software. Day traders should also have two monitors to watch charts and data.

The most important day trading equipment may be a steady internet connection. With a reliable wi-fi connection, traders have less risk of missing important trades if there’s an internet crash. A backup internet connection is also recommended for traders who are day trading at home.

Why is there a resurgence in day trading stocks?

Once investors start day trading stocks, they can join a plethora of new investors. There has been a recent revival in day trading for two key reasons. The recent volatility in the stock market has led many people to try to make money by day trading stocks.

Goldman Sachs analysts noted that the new influx of traders is driving movement in the options market.

“Investors are increasingly asking us about the participation of individual investors in the shares and options market. Our data suggests that individual investors are indeed a significant proportion of daily volume, ” noted Goldman Sachs analysts.

Sports betting drought leads to day trading increase

Another reason for the resurgence in day trading stocks is strangely enough because of sports. COVID-19 shut down sports events, so there were fans missing games to watch- and bet on as well. Instead of betting on the performance of LeBron James, gamblers are now betting on the performance of Tesla (NASDAQ:TSLA) stock.

In addition to trading on their own, sports gamblers are also following the stock picks from the head of a sports website. Barstool Sports’ Dave Portnoy has picked winning stocks during this bear market. He compares day trading in the current market to the unpredictability of a sports event.

“With the volatility, it is kind of like watching a sports game,” said Portnoy.

Jim Bianco is president and macro strategist at Bianco Research and monitors day trading trends. He noted that young gamblers are moving to day trading with the latest sports hiatus.

“Sports gambling is a huge business in this country and a lot of sports gamblers and a lot of these millennial gamers are now playing the stock market, day trading,” said Bianco.

What are the benefits of day trading?

After Buffett dropped his airline holdings, Portnoy bought stock in the troubled industry. When the airline stocks rebounded, he felt vindicated as a budding financial expert.

“I’m a little surprised that it’s become pretty well known within the financial community. That’s kind of our target audience regardless of what we’re covering and I think Barstool was popular in those circles to begin with,” said Portnoy.

Portnoy’s contrarian investing is a day trading strategy that can work if a day trader is diligent and studies the markets well. If a day trader is savvy with their trades, they may profit from going against the popular opinion of Wall Street experts.

Zero-commission apps lead to more day trading

The rise of Robinhood and other zero-commission trading apps are helping drive the rise of day trading. Andrew Laphorne is a stock analyst at Societe Generale. He said that new day traders bought cheap stocks as the economy cratered and profited as the market is slowly rebounding now.

“For all the mocking of Robinhood investors, their timing back into the market looks impeccable, with a significant pick-up in holdings as equity markets bottomed in mid-March,” noted Laphorne.

Airlines rebound with new day traders

Despite Warren Buffett selling airline stocks, young day traders are lifting the industry back up. An airline ETF, JETS, saw its value rise a whopping 2,000%. Millennial day traders purchasing the ETF led to its rebound.

Frank Holmes, chief executive officer of JETS issuer U.S. Global Investors, loves the recovery. He believes that young day traders buying the dip helped JETS’ value grow to $1 billion.

“All these millennials, being stuck at home with no bars to go to and no beaches to travel to, took their money and became day traders. They’re bored, they want to make money,” said Holmes.

Financial advisors cheer new growth in day trading stocks

Many financial advisors welcome the new breed of day traders. Nate Geraci is president of the investment advisory firm, the ETF Store. He sees Portnoy as a social media savvy version of investing giant Warren Buffett. Geraci also credits Portnoy for making day trading entertaining to his millennial followers.

“It’s really been a perfect storm. Investors are seeing firsthand the thrill of victory, the agony of defeat, and he’s doing it with large sums of money, so I think for younger investors, that’s really enticing,” said Geraci.

Day trading may be best for people who want to make quick profits from short sales. For short-term investors, day trading can be a quick way to earn money. Josh Brown is the chief executive of Ritholz Wealth Management and says day traders are just having fun day trading stocks.

“They’re not expecting to retire off of trading stocks. They’re having fun and they’re learning the market, and I think it’s great,” said Brown.

Day trading can also best for self-starters who want to work independently. Day trading stocks may be best for traders who learn best by learning on their own.

What are the risks of day trading?

While there are some benefits to day trading stocks, there are many risks associated with day trading.

Despite his recent success with day trading, Portnoy cautions that his Twitter followers shouldn’t heed all his financial advice.

“I’m not a financial advisor. Don’t trust anything I say about stocks,” said Portnoy.

While Portnoy’s day trading venture is currently paying off, it’s risky to follow advice from people who aren’t financial experts. In addition to not listening to experts, day traders shouldn’t just follow their emotions. Making rash trades based on emotion leads to more losses. Traders who buy and sell stocks without stop-loss limits can risk losing more capital than they can afford.

Day traders can lose a lot of money if they don’t limit their number of trades. Trading too much can lead to a lot of fees for traders. Setting stop-loss orders can help minimize risk. Many traders also buy stocks on margin and borrow too much money to trade stocks. Day traders should stick to a set limit on how much to trade and not depend too much on margin and leverage.

Financial experts warn about day trading inexperience

Day trading novices may feel a rush from their new venture, but there are risks. Caleb Silver, Investopedia’s editor-in-chief, believes that day trading beginners should be cautious with the large volatility in the stock market.

“People are new to trading and new to investing and want to take advantage of these wild swings,” said Silver.

“These are the most dangerous times to start day trading … This is when people really get hurt,” added Silver.

Silver noted that day traders must know their limits when trading so they don’t lose too much money.

“This is a super volatile time. You could lose your shirt in a day. You could gain two shirts back the next day, but you have to know what your limits are,” said Silver.

Mark Cuban cautions about day trading boom

Shark Tank star and Dallas Mavericks owner Mark Cuban is wary about the day trading boom. He thinks that zero-commission costs enable day traders to take more unnecessary risks.

“We have day traders who are able to go into margin with next to 0% interest. They’ve got nothing else to do. Their transaction costs are zero,” said Cuban.

Cuban also believes that once the economy slows again, there will be huge sell-off among day traders.

“You can also make the argument that this whole run-up is just buying the rumor. Once we start to really have definitive data on the other side, people are going to sell on the news, and if I had to make a bet, that’s it,” said Cuban.

Cuban also noted that the resurgence in the stock market will depend on how many workers are rehired.

“A key question is how many workers will be rehired and how consumer spending will fare once enhanced unemployment benefits end on July 31,” noted Cuban.

Cuban doesn’t think that day traders are fully prepared for another economic slowdown.

“We don’t know if all the jobs are going to be there, and we don’t know what happens with demand. I don’t think the market is truly understanding the challenges that we may be facing,” added Cuban.

Day trading rarely leads to profits

In addition to the risk of losing money, there is the risk of not earning much money at all. While many day traders tout the quick money that can be made, those profits rarely come through. A Brazilian study found that only 0.1% of day traders earned more than the nation’s minimum wage after almost a year of day trading stocks. The study noted the poor success rate of independent day traders.

“97% of them lost money, only 0.4% earned more than a bank teller (US$54 per day), and the top individual earned only US$310 per day with great risk (a standard deviation of US$2,560). Additionally, we find no evidence of learning by day trading,” noted the study.

Day traders should expect to lose a lot of money before they see any profits. Even if traders earn any income, they can lose portions of their wins through high taxes. Short-term gains are taxed at a higher rate than long-term capital gains.

What advice do day traders give?

Day traders can get advice from more experienced traders. Jason Bond is an experienced trader that touts his experience as a trader.

“Having trained multiple clients who’ve gone from cubicles with small trading accounts between $10,000 to $37,000 to successful, full-time day traders, making millions in just a few years, I have verified proof people can make the leap from their career to trading full time,” said Bond.

Bond also suggests that beginning day traders should get mentors to help them navigate the ups and downs of the markets.

“The best way to become a day trader is to learn from existing profitable day traders. There’s an overwhelming amount of theoretical material on the internet about how to day trade, but nothing beats learning from someone who is currently successful at it,” said Bond.

Day trading expert Brandon Wendell also says that not holding stocks for too long can lower risk.

“One of the best ways to control risk is limiting the length of the trade. The longer you are in a position, the greater the likelihood is that price could move against you. By day trading, you eliminate overnight and weekend risk, especially when you trade markets that close, like stocks,” said Wendell.

Discipline is key to day trading stocks

While Bond had success as a trader, many other day traders note that success doesn’t come easily. Deeyana Angelo is a managing director of Market Stalkers. She stresses that being a day trader requires a lot of training and discipline.

“Becoming a day trader is something that a lot of people see as an easy way to make money where you don’t need much experience – just click a few buttons and hey presto, you’re rich! But nothing is further from the truth,” said Angelo.

Brandon Wendell, an investment expert, noted that limiting risk and not holding stocks for too long is key to success as a day trader.

“Day trading is a very difficult performance discipline, much like becoming a professional football player or playing a musical instrument to a virtuoso level. You first need to have a natural talent, followed by years of practice,” added Angelo.

Merlin Rothfeld is an investment strategist that studies day trading. Rothfeld advises investors who are day trading stocks to be patient because they will monitoring screens all day. Rothfeld also doesn’t want traders to stray from a well-thought-out trading strategy out of fear or haste.

“Quite often, day traders will take trades because they are just sitting in front of their screen all day. A forced trade is generally going to be a losing trade. Always follow your rules,” said Rothfeld.

How much do day traders make?

A day trader’s salary can vary greatly. If a trader is working independently, they face an uphill climb to a steady salary. Freelance day trading is similar to a sales position. There are times when income is high, especially if trades are executed well. A day trader may also make very little money if the stock market tumbles or a trading strategy backfires.

An independent day trader’s salary will also depend on how much capital they have invested in the stock market. As noted in a previous TradingSim article about a day trader’s salary, an average day trader’s salary has a 20% annual return. If a trader has $100,000 in an account, they may have profits of $20,000 in the best-case scenario.

Day trading for a firm has a more stable salary. According to ZipRecruiter, the average salary of a day trader is $80,000. However, that depends on experience and the city a trader is located in as well.

If a day trader has years of experience and lives in a small town, that’s a substantial amount of money. However, if a day trader has substantial debt from buying stocks on margin, lives in a major city, and has other major expenses, that amount may not go as far as originally thought.

How does day trading at home compare to working from a firm?

There are many differences between day trading stocks at home and at a proprietary trading firm. When a day trader is working from home, they have more flexibility. Day trading stocks requires a lot of studying and commitment. Traders can focus on the stock market in their home offices and their trades without distractions in a noisy firm. Day traders can also keep more of their profits than a trader in a firm.

However, there are downsides as well. Many distractions from friends, family, and IT emergencies can derail a trading day. Day trading at home means that they have to shoulder economic burdens on their own.

For day traders in private trading firms, there are some advantages. Day traders in an office can have more help on a trading floor from more experienced traders. Day trading with a firm’s funds lessens a financial burden of day traders.

There disadvantages of being a day trader in a proprietary firm as well. Day traders in proprietary firms are just paid as contractors and not salaried employees. They also keep less of their profits than an independent trader. Day traders in firms often have to pay for training fees or give their employers a cut of their profits.

How does day trading at home compare to other work-from-home jobs?

Day trading can be much more challenging than other work-from-home jobs. There is a range of jobs that pay less and some that pay more than day trading at home.

Working from home is a growing option. A study from Upwork and the Freelancers Union found that over 50% of workers were working from home just three years ago. After the COVID-19 pandemic, that number is sure to increase.

If a trader from home can make $40,000 a year on average, there are jobs that pay less. Virtual assistants that perform administrative duties can make on average $26,000 a year. Freelance writers can earn a range from $10,000 to $30,000 a year.

Those careers pay less than an average day trader’s salary. There are some work-from-home jobs that pay more like in the customer service industry.

Brie Reynolds is a career development expert at work-from job site FlexJobs. She notes that customer service is an in-demand job that can pay more steadily than day trading stocks at home.

“Customer Service is the No. 1 field for remote jobs right now. This is a field without a lot of barriers to entry in terms of experience or education levels. Unemployed retail workers who enjoy helping people may be able to use their skills in communication, problem- solving and sales to transition to a remote customer service job,” said Reynolds.

Customer service jobs may pay as much as $60,000 a year. Data and IT work-from home jobs are the most lucrative. Data analysts can make $50,000 a year. A website support specialist can earn $100,000 a year.

Some jobs pay less and some are more lucrative than day trading from home. Day trading is on average at the low end of the spectrum with earnings of $20,000-$30,000 a year

How do day traders find the best stocks?

As noted in a previous TradingSim article about finding the best stocks to day trade, there are methods to pick top stocks. Day traders should look for stocks that have high volume to move quickly in and out of their positions. They can monitor them on financial websites like Yahoo Finance. TradingSim charts enable day traders to simulate trading and test out their strategies before investing in stocks.

Below are five stocks that would be best for day traders that are day trading at home.

1. Apple

As a TradingSim article noted, Apple(NASDAQ:AAPL) is a perfect stock for day traders. Apple is moving 22 million shares are bought and sold daily. The tech giant’s high volume makes the stock attractive to day traders.

Financial experts rate Apple as a buy

Many financial experts think that Apple is a buy in this bull market. Todd Gordon is managing director at Ascent Wealth Partners and monitors Apple stock. He believes that Apple stock can rise 40% over the next few weeks.

“If you look at the three advances since 2013, each has been at least 130% followed by a one-third giveback. The current advance is only 66%, so we can easily — if history is to repeat — see another 70% in years to come, putting us at $490 potentially,” said Gordon.

Steve Chiavarone, portfolio manager at Federated Hermes, also believes that a strong balance sheet and consumer demand will drive high volumes of Apple stock.

“Growth has been the new defensive. Strong cash flows have met strong balance sheets which means you haven’t been under pressure because you needed external financing, and your return on capital is safe,” said Chiavarone.

He also believes Apple “consumers have pent-up demand. They have stockpiled savings, and we expect the consumer to have a good second half.”

Charts show Apple stock a top pick for day traders

Blue Line Capital President Bill Baruch noted that charts show that Apple avoided a death cross. A death cross is when the 50-day moving average moves below the 200-day moving average. Apple has avoided that drop, which makes it a top pick for day trading, according to Baruch.

“It broke out above last year’s high, a big resistance level at $327. Now, that is support, and overall you also have a rising trend line from the lows in March, and for me $327 to $330 is going to be a huge support level,” said Baruch.

“I also want to point out that it did not get the death cross, and the fact that the 50-day moving average rejected crossing below the 200-day moving average in May — it fueled the upside as it has done in many of the tech stocks,” added Baruch.

Apple’s high volume of stock movement and bullish analysis from financial experts make the stock a top pick for day traders.

2. Facebook

As noted in a TradingSim e-book, Facebook(NASDAQ:FB) is a favorite stock for day traders. Facebook has 25 million shares moving daily. The liquidity makes Facebook an ideal stock for day traders to quickly exit positions. Facebook CEO Mark Zuckerberg noted that the company’s success depends on its Marketplace division and dependence on small businesses.

“Overall, though, our business depends on the success of small businesses. So, this is a moment where we feel that we’re well-positioned to be champions for small businesses interests and supporters of important infrastructure that they’re going to need in order to move online,” said Zuckerberg.

Financial experts bullish on Facebook stock

Financial expert Jim Woods says Facebook’s stock is outpacing other tech stocks.

“That stock is outpacing 97% of all other publicly traded companies in terms of relative price strength,” said Woods.

Citi’s Jason Bezinet predicts a $7 billion growth for the company because of its upcoming Shops e-commerce division. “

“The firm should benefit from: a) the continued growth in e-commerce and b) the growing propensity of consumers to shop within social media apps,” said Bezinet.

3. Tesla

Tesla(NASDAQ:TSLA) would be a great stock for day traders that want a stock with high volume and volatility. The corporation’s stock is trading at 16 million shares a day. The electric car company’s stock soared to $1,000 a share after a better-than-average rate of car deliveries.

Jefferies upgraded its price target of Tesla up to $1,200 after Tesla’s stock climbed. Analyst Phillipe Houchois wrote in a note to clients that coronavirus will drive consumers to want more electric automobiles like Tesla.

“We see COVID-19 as an accelerator of the transition to EVs and renewables, from consumers and public policy,” said Houchois.

Horchois also noted that Tesla is more advanced than its automobile competitors with its technology.

“Tesla remains significantly ahead of peers in product range, capacity and technology. Near term, EV-friendly incentives in the European Union and lower-priced Model 3 support second-half volume, making Tesla more resilient than peers,” wrote Horchois.

“Against expectations even a few months back, the gap with peers is widening, from product to battery tech/capacity,” added Horchois.

Some analysts bearish on Tesla stock

While Jefferies upgraded Tesla to a buy, Goldman Sachs downgraded its rating of Tesla down to neutral because of its high valuation.

“We’d look to become more positive on Tesla stock again if we had more confidence in the near to intermediate-term trajectory of fundamentals, or if valuation became more attractive. We maintain our view that the electric vehicle market offers attractive long-term growth, and we think Tesla will be able to sustain a leading position in EVs[electric vehicles] (and with solid margins),” noted Goldman Sachs.

Morgan Stanley also downgraded its rating because of something that may be a benefit to day traders- Tesla’s high volatility.

“While Tesla has long been an expensive stock, and we recognize that valuation has expanded for the entire market, we believe that there is a higher bar for Tesla’s fundamentals than other stocks that may have challenging near-term results given Tesla’s premium absolute multiple along with the historical volatility of Tesla shares,” said Morgan Stanley.

While establishment banks may disapprove of Tesla’s volatility, the high volatility and volume make the stock a good choice for day traders.

4. Microsoft

Microsoft (NASDAQ:MSFT) is another large-cap, high-volume stock that may be good for day traders. The corporation’s stock rose after a positive Q1 2020 earnings report. Jefferies analyst Brent Thill rated Microsoft stock a solid buy. The work-from-home boom during the recent quarantine boosted its Microsoft Teams service.

“The biggest beneficiary of the new work from home environment is in the productivity suite and especially Microsoft Teams, which has seen a large spike in demand,” wrote Thill in a note to clients.

5. Roku

Roku (NASDAQ:ROKU) is a streaming disruptor that has soaring stock and volume. The company has 19 million shares moving each day. Roku will partner with Kroger to use data to attract more customers. The move led Rosenblatt analyst Mark Zgutowicz to rate Roku stock a buy.

“Roku shopper data program, launched with one of the largest global grocery retailers, shows significant potential to alleviate friction between linear and CTV ad buys,” said Zgutowitz.

Roku’s stock rose 6% this year as more customers stayed home and canceled their cable subscriptions.

The high volume of Roku stock makes it a good buy for day traders.

Laura Martin is also bullish on Roku stock as more American viewers move from cable to streaming TV services.

“Roku had 45% (40 million of 88 million) of total connected TV homes in the US at 3/31/20, and therefore we believe Roku will be the winning aggregator of streaming TV and film content apps,” said Martin.

Analysis and patience key to day trading from home

To make money quickly from day trading at home, ironically, a lot of waiting is required. Building an effective trading strategy and studying the stock market is key. Working from home as a day trader can be a nice side hustle for beginners, but not a lucrative career to retire from in 30 years.

Despite what some traders on zero-commission apps may say, day trading is not a harmless get-rich-quick scheme. The stock market is cyclical and what goes up always eventually comes down. With TradingSim’s blogs, charts, and insights, day traders can learn more about how to withstand the unpredictability in the stock market to make money in the stock market.

In other industries, buying power describes the amount of purchasing power for goods and services.

What is margin purchasing power? In the context of this article, buying power is the available margin for trading.

Where to Find Your Buying Power Limits

Buying Power (Source - Tradeking) — Buying Power (Source – TradeKing)

In a margin account, buying power is the sum of the total cash and the maximum margin available.

For example, a margin account with $5,000 cash and a margin rate of 50%, has a total buying power of $10,000 (two times $5000).

How Much Can You Borrow on Margin?

SEC Limits

The U.S. Securities Exchange Commission (SEC) prohibits investors from borrowing more than 25 percent of their cash in stock. ^[1]

For example, if you purchase $1,000 of IBM, you will need to have at a minimum 250 dollars in the account.

Maintenance Margin Requirements

To this point, we have discussed margin requirements. But what happens once you are in the position?

Meaning if the stock goes against you, how much money do you need to maintain in your account before you receive a margin call?

In the below example, we will walk through the math for the maintenance requirement.

Maintenance Requirement Example

Example of initial margin and maintenance margin:

Buy 1,000 shares of a $10 stock ($10,000)
Stock has 50% margin requirement (requires $5,000 cash)
If the brokerage firm has a 25% maintenance requirement, you must have 2,500 dollars in the account to maintain the position.

Once you fall below this maintenance requirement, you will receive a margin call from your broker. After receiving a margin call, you need to either deposit more cash or close out the entire position.

Calculating Day Trading Buying Power

According to the SEC, a pattern day trader is someone who has at least four day trades within five business days. ^[2]

Pattern day traders are allowed to use 4:1 intraday margin. So, an account with a value of $50,000 has a buying power of $200,000.

Under this rule, pattern day traders must maintain $25,000 in their cash account.

However, there is one caveat; this is only for intraday positions. For overnight positions, the margin requirement is double – 2:1.

Increasing the requirement makes sense because the brokerage firm would not want overnight exposure where a stock could gap up or down due to a news event.

Buying Power for Different Markets

Options

The concept of buying power is a bit more complicated for options and comes down to the top of options trade you are placing.

Long options, for example, are short term in nature and due to the time decay do not have any loan value.

Check out this full table from TD Ameritrade which covers the various options requirements. Please note, it can get a bit complicated, so you will need to really understand what is required from you based on the amount of cash and trade type.

Forex

Forex which trades over the counter can have buying power as high as 50 to 1.

This buying power can vary from one brokerage to another.

The initial margin requirement can range from 3% to 10% on average. For a list of Forex maintenance requirements, check out this table from Forex.com.

Futures

Futures margin requirements are not as loose as Forex but runs a close second. You only need on average between 5% to 15% of cash on hand for your total position.

Check out this table from Daniels Trading which provides a list of requirements by futures type. What I really like about this table is the fact the broker calls out the initial margin requirement, maintenance requirements and then the daily requirement.

Risks of Trading on Margin

Using margin can be risky. ^[3] Most retail traders only think of margin as a tool to increase their profits.

They do not think of margin as a means to hedge against an open position.

Imagine if a trader goes all-in on a day trade with four times margin and the stock goes against them by 5%.

This would mean that trader just took a 20% hit on their total portfolio on one trade.

Hence, trading with margin is not for beginners.

While there are proper checks in place to ensure that you do not end up losing more than what you invested (including margin), it is not always that case.

The buying power in the markets are best used in moderation and a trader shouldn’t even think about utilizing all of the buying power simply because it is available.

How Can Tradingsim Help?

Tradingsim currently has equities and futures in the platform. You can practice trading these security types to ensure you are able to stay within the set margin requirements.

External References

In this article, we will review the 5 ways you can avoid the dreaded margin call. If you trade long enough, at some point you are going to get one.

Before we dive into the methods, let’s first discuss how you end up in a spot where you are on the receiving end of a margin call.

What is Margin?

Trading on margin is when you use borrowed funds to increase your trading capital. For overnight positions, the standard margin is two to one. If you are day trading the standard overnight leverage is four to one. This means if you have an account value of thirty thousand, you will be able to trade up to 120 thousand during the day.

Improper Use of Margin

When trading there are specific margin requirements for the type of security you are trading and for specific stocks.

This is the way the brokers protect themselves as you are using their funds to conduct your trading business. So, what happens when you decide to go to heavy into one position?

Or what happens when you short a penny stock that begins to explode shortly after the open?

These are just two examples of how you can improperly use the margin and things get out of hand. I personally only use cash as I am not in a rush and I know that given the right circumstances, I’m liable to do something stupid.

So, if you find yourself in one of these positions and things are getting out of hand, your broker will notify you with a margin call. This call is their way of communicating that there is too much risk in the position.

Now that you have an understanding of margin and how you can inadvertently misuse funds, let’s dive into 5 ways to avoid a margin call.

#1 – Have a Better Understanding of Margin Maintenance Requirements

Margin call is when maintenance margin falls below a certain limit

Traders place a lot of focus on entry levels and trading systems. But few put emphasis on money management and this includes trading with margin.

Every security you trade will have margin requirements. Again, this will vary by security. The times where I have found myself in a jam were when I did not have a clear understanding of these requirements.

These stocks that go beyond the standard margin terms are listed on the special margin requirements sheet. Every broker will have one of these lists public on their website.

If you plan on trading high volatile stocks or penny stocks you will need to do a spot check of this list if you plan on using more than your cash on hand. Below are some general maintenance requirements across all brokerage firms you should be aware of. These are requirements set by the government.

Example of Special Margin Requirements

Here is an example of special margin requirements from the brokerage firm First Trade.

Notice in the above list how some of the stocks have 100% cash requirements. This means you need dollar for dollar cash on hand in order to hold the position.

Another key point to notice is that for short positions, you will need to cover more of the position as the brokers need to protect themselves from unlimited upside risk.

You will need to pay close attention to these lists.

#2 – Know the Margin Requirements for All Open Orders and Positions

Knowing the margin requirements for an asset beforehand can save you a lot of trouble

Knowing the special margin requirement for a security is a great start. But unless you plan on only trading one position, you will need to know the margin requirements for the pool of stocks you plan on carrying.

For example, you can have two active positions and one open position with a stock that has a significant margin requirement. Now, ideally your broker would reject the order before it executes, but that doesn’t always happen.

So, you can end up in a situation where if the last order is executed you will immediately be in a tight position and with a few wrong ticks forced to close or reduce your position sizes.

#3 – Use Trailing Stops or Stop Loss Orders to Avoid Margin Calls

In addition to using sound money management techniques, you can also use stops to manage your portfolio.

The simple point is that you do not let positions go against you so far that you can get into a situation where you fall below the maintenance requirement.

You will need to make sure you honor your stop, regardless of the method for this to work.

The worst situation you can find yourself in is if you are short a stock and it starts to go against you in a parabolic fashion and you do not put a stop to it.

#4 – Scale Into Your Positions

You may feel inclined to just go at a position full tilt with no regard for your well being. You just see that opportunity and jump on board with little to no hesitation.

This can lead to overexposure even before the stock has had a chance to prove itself.

One approach you can take is to build up your positions in thirds. You can add a third each time the stock continues to go in your favor. This way if the stock begins to fail you, you are not in a spot where the dreaded margin call is right around the corner.

#5 – Don’t Trade with Margin

This is the most obvious way to stay out of trouble. Jus trade with cash.

This is my personal method for trading the markets. I am not concerned with the additional cash margin can bring my way. When does it end?

Let’s say you are trading with $50,000 dollars and with margin can go up to $200,000. So, what happens when you grow your account up ot a million? Do you now use 4 million in margin?

Do you see where I am coming from? If growing an account comes down to the time, then why not just take your time and let things play out.

How Can Tradingsim Help?

You can practice trading with margin in Tradingsim to see if you are able to maintain the required funds to avoid a call.

Overview of Pattern Day Trader

First, let’s establish the definition of a pattern day trader.

A pattern day trader is when you open four or more round-trip trades in five business days. So, if you open one trade each day Monday through Thursday, by Friday morning you have now been tagged as a pattern day trader.

Brokerage Firm Notification

Once you have decided to be a rebel and place the four or more trades, you will get a notification from your brokerage firm.

This notification will make you feel like you have just made America’s Most Wanted list.

You will receive an email, text, and notification within your platform. This notification will look something like this:

How do I know? This notification was sent to me from Interactive Brokers!

Why Did I Receive the Notification?

I was trading the Nikkei for over a year trying to crack that market.

Unlike America, Japan does not have a restrictive 25k margin requirement, so this allowed me to trade the market with a small account.

At any rate, IB had some tech update which flagged my account as a pattern day trader because my home country was not Japan. So, just like that my global equities trading dream was crushed.

I’m going to get into why the pattern day trader rule is completely bogus in my eyes.

Pattern Day Trader Restrictions

Going back to the photo, look at the restrictions that were placed on me:

The account must have a balance of $25,ooo.
I have to wait 95 days from the time my account has triggered the PDT trigger to trade. This is the wake-up call that if I don’t stop my account will be locked and I cannot place trades.
I can ask for a review of my account status, and Interactive Broker will do a manual review, and if I am lucky, they will lift the lock. But this comes with the catch of I can only request this review once every six months.

Now please do not take this post as a bash of Interactive Brokers. They are at the mercy of the Financial Industry Regulatory Authority (FINRA) that are enforcing FINRA Rule 4210, which governs margin and how much money you need to have in your account.

Why Do We Even Have the Pattern Day Trader Designation?

After the internet bubble of the late 90s, it was believed that speculators were the reason for the crash. The government also felt that the everyday retail investors were all trying to get rich, and lost money that they otherwise would not have if they hadn’t had these dreams of financial independence.

The government felt that they were protecting the retail traders by creating margin requirements.

How did the Government come up with 25k?

You guessed it; the government talked to the brokerage firms. Now, you would think the question would be is there any empirical data that shows a person with a certain asset level is more likely to succeed at day trading?

Wrong.

It was never about protecting us; it was about protecting the banks. The banks gave the feedback that $25,000 was the floor because this is the level banks felt was required to give them the cushion they need to manage the risks associated with margin accounts.

Don’t believe me, check out FINRA’s website which provides an even more detailed answer.

This is where I just lose it.

There were dozens of other options the Government could have taken to address this issue. For example, don’t allow four times margin. Place even greater cash requirements for shorting or trading highly volatile stocks.

None of these worked, that would have protected Americans wallets while still allowing us to achieve our financial dreams. What they decided to do was increase the size of the cash required by retail traders.

Why Would Brokerage Firms Want Us to Have 25k

For me, it’s as simple as this – greed.

Most retail traders end up washing out. I’m not going to labor over this negative topic, but it’s just the fact. Again, I believe this has little to do with people’s actual ability to pick up trading, but more to do with they don’t give themselves the time they need to master their craft.

Hell, it took me close to 5 years of grinding it out before I was able to turn a consistent profit weekly.

So, the banks and brokerage firms know that becoming a professional trader is not easy.

The 25k just allows you to place more unnecessary trades with little to no knowledge of what you are doing so the brokers can reap the trading commissions. Having a larger account value keeps you in the game longer, which again keeps their commission stream flowing.

Studies Show a Grim Picture

France conducted a study of retail trader performance and published the data. For some reason, we are unable to do the same thing in America.

The study showed that over 90% of traders lose money.

Of the 10% that made money, on average their take was 2,190 Euros a year.

Sorry, but that’s not enough money to live on. So again, why are we asking people to fund accounts with $25,000 if they are not likely to turn a profit?

A Larger Starting Account Balance Does Not Equal Success

Let me be the first to tell you that an investor with $10,000 dollars and an investor with $500,000 have the same level of risks when it comes to losing money.

A person may have just had a more lucrative career or received a large inheritance. It doesn’t mean that person will somehow be a better investor or able to manage the risk more effectively. This logic is just completely biased and quite frankly un-American.

I have talked to traders that have lost a million dollars, and that was there only million dollars. So, again it’s all relative.

People Find Ways to Fund the 25k

The real problem is that people will scrape and claw to get up to the $25,000 level using credit cards and dipping into an emergency fund. It can get really bad once people go to one of these off-shore brokerage firms with ridiculous fees in hopes of building their account up to the 25k requirement.

4x Margin is the Real Issue

Instead of figuring out how to trade profitably, trades want to make money and make money fast. They then fall into the trap of using some or all of their four times buying power to start trading.

Well, what do you think happens when a trader with little experience and $100,000 starts trading with $400,000 using margin? You guessed it; they blow up their account.

This Reduces Access to the World of Active Trading

Why should I be able to day trade and not one of my other fellow citizens? Just because I have more money in an account? The whole idea is ridiculous.

The markets did just fine before this rule was in place and it does not prevent selloffs; the mortgage crisis proves my point.

By reducing access to the markets, we reduce liquidity which is the lifeblood of our economy.

How Do You Get Around The Requirement

Open More Than One Account

You can open accounts with different firms. Since each account can place three trades in a five business day cycle, if you have four accounts, you can place nine trades in a week.

Unless you are scalping, this is all you need to get started. This way you can fund each account with the smallest amount but still get the experience of placing real trades.

This also prevents you from losing major funds. With some brokerage firms requiring only $2,000 dollars to get started, you could be up and running with four to six thousand dollars.

I don’t want to minimize how difficult it is to come up with that kind of money, but it’s much better than having to produce $30k.

Remember, 25k just allows you to place the trades, if you go one dollar below the threshold you will start to get the notices like the one above.

Some will say you can fund the account but not use the money. I have two issues with that point: (1) who wants to just park money in an account and not make a solid return on it and (2) at some point your discipline may get the best of you, and you start to dip into those funds.

In Summary

First thing is you need to accept learning to trade is hard. Anyone that tells you otherwise is setting you up for unrealistic expectations.

Learning strategies and patterns isn’t even the half of it. Trading is mostly mental, requires tremendous discipline and money management skills.

These are things as a discretionary trader you have to learn over time by placing trades.

How Can Tradingsim Help?

If you are impacted by this designation, you can practice trading in Tradingsim 24/7 and learn how to find the strategy and money management techniques that work best for you.

Again, the winners in this game all have had enough time to learn and master the craft. Just having $25,000 will not guarantee your success.

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Good traders are known to be masters of risk management. Risk management includes a detailed trading plan, setting stops and limit orders and managing trades without succumbing to emotions.

The focus for these traders is capital preservation with profits running a strong second.

Time Intervals for Setting Limits

The key to preserving profits is setting limits on a daily, weekly and monthly basis.

Trading with limits ensures that you “put the curbs” in when you are experiencing a losing streak.

When the daily loss limit is reached, disciplined traders shut the computer off. This same rule of shutting it down applies for weekly and even monthly periods.

How Trading Limits Help Tame the Beast

Setting a trading limit has many benefits. It may seem counterintuitive as the word limit generally mans restrictive.

As a trader, you will have times where your emotions get the best of you, and you begin to over trade and make poor decisions. Letting your emotions get the best of you is subtle at best and creeps up on you.

It’s not like you are screaming at your computer and throwing monitors. It’s more about slowly losing the discipline and letting slight deviations from your trading rules.

This may occur in the form of you widening your stops or adding too much size to a position. It’s these small diversions from your plan that lead to big losses.

This again is where the trading limits come into play as it stops you before you do too much damage to your account – hence taming the beast.

Reduce Emotional Pain

One thing that isn’t talked about enough in the trading community is the trauma you experience with big losers. All sorts of fight or flight, caveman level emotions will run through your body.

Let me be first to say trading does not need to carry this level of stress and worry. Limits will help you reduce the drawdown in your account.

You should never experience days where you are down 20% on your account. Again, beyond the drawdown, imagine the damage done to your confidence and psyche with that level of short-term loss.

Tracking Your – Daily, Weekly, Monthly, and Yearly Limits

Setting trading Goals-Limits – Daily, Weekly and Monthly (Source - MyFxbook.com) — Setting trading Goals-Limits – Daily, Weekly, and Monthly (Source – MyFxbook.com)

In the above image, you can see the daily, weekly, monthly and yearly numbers in terms of profits and losses in this online trading journal. These online journals will have a setting to alert you if your trading limit is breached.

Ideally, your trading platform will automatically lock you out of your account, but most retail brokerage firms have no interest in protecting you our your money.

So, if your brokerage firm does not provide the alert, this is something you will need to do manually by having alerts trigger once you go beyond your limit.

Again, you can use an online journal which imports your trades like tradervue, or you can manually track your trades in excel. I will be the first to admit that when I have been on a losing streak in the past, I have not wanted to track anything. The sight of the market or my trades made me sick.

Just know your limitations and what system works best for you in terms of measuring yourself against your limits and make sure you protect yourself.

How to Set Trading Limits?

This is a value that only you can set. This limit should be determined based on your trading results.

Meaning if one person sets a trading limit of 1% of their portfolio for the day, you might hit a 1% intraday loss on one trade because your strategy calls for more volatility.

You just need to focus on figuring out the right number for the daily loss limit that works for you.

You can then take this amount and extrapolate it for the week and the month.

What Happens When You Hit Your Limit?

We have already made it clear that once you hit your limit, you stop.

But stopping alone is not going to fix the bigger issue that you are making poor trading and money management decisions.

Lower Per Trade Amount

Once it’s time for you to start trading again, the first thing you are going to want to do is lower the amount of money you are using per trade.

If you are unable to turn a profit, it’s already bad enough. But if you are hitting weekly down limits, the last thing you should be doing is trading with size.

The reduction should be severe. Such as a 50% reduction in the amount of funds per trade. If you are still unable to get a handle on things, you will want to increase your reduction to 90%.

It should get to a point you are even wondering why you are trading because your trade size is so small that even if you win, you won’t be able to take a date to the movies with the profits.

Remember, it’s about building the discipline and not about how much money you can make.

Trade on a Simulator

You may need to place more trades to get out of your reckless behavior. However, the last place you should trade is in the live market.

To this point, you can work through your recklessness in a market replay tool like Tradingsim.

If you can’t respect the limits in the simulator, you are not going to hit your goals in a live account.

Analyze Your Trades

The one positive out of hitting your limit is you have trade data to review. Meaning you can look at what you got right and what didn’t go so well.

See if your issue is losers that you let get away from you or a string of bad decisions.

One thing I have learned throughout my trading career is the power of finding out how you can improve by reviewing the data.

Profit Potential

For example, how far do your stocks run? This will help you understand the maximum profit potential you can make on a trade.

Time In Trade

A big improvement for me was analyzing how long it takes for my winners to work out. Once I had that number if I was in a trade and I was exceeding this average time I knew I was in hope mode and not trade mode. You will be surprised how many of your losers come down to sitting in trades too long that are just not going to work out.

Volatility

I had to find out the hard way that I’m not built for trading penny stocks. I just couldn’t handle the volatility, and things would get away from me too fast even if I were using a small amount of money.

Journal

Journaling will uncover all the things you are hiding, even from yourself. It will force you not only to review your trades, but also figure out what is going on in your head which is sabotaging your trading performance.

Use this time off to update and review your trade journal. Then spend hours in your market replay tool to see if your emotions match what was happening on the chart.

What the Pros Suggest

Mike Bellafiore, trading mentor, co-founder of SMB Capital and author of the best sellers, One Good Trade and The PlayBook recommends that traders should limit their losses to half of a good day.

So, if you normally make 1,000 per day, you should look to risk no more than 500. This ensures you never let things get too far out of control.

How Can Tradingsim Help

You can use Tradingsim to set your daily and weekly loss limits to see if you can exercise discipline.

Remember, loss limits are not a bad phrase. You need to learn to do less in terms of size and trading activity until you can reach the point where you can make profits consistently.

Margin Account vs. Cash Account: Which is better for traders?

What is a margin account?

What do brokers like Robinhood charge to trade on margin?

What are the rules for a margin account?

What are the advantages of a margin account?

Margin can help bring more investors into trading

Some financial advisors say margin wins in margin vs. cash accounts

Trading on margin better for experienced traders

Buying stocks on margin can postpone capital gains taxes

Forex trading on margin is most common

What are the disadvantages of a margin account?

High interest rates can cause problems for margin accounts

What do financial experts say about trading on margin?

Tesla margin requirements impact investors

Investors shouldn’t buy too many stocks on margin, experts warn

Financial advisers advise traders to borrow on margin carefully

What happens when an account is on margin call?

Will margin accounts be in more danger after the quarantine?

What should investors do when they’re on margin call?

How can an investor avoid margin call?

Where do investors trade on margin?

How can investors trade with a cash account?

What is the difference between a margin account vs. cash account?

What are the benefits of using cash accounts?

What are the disadvantages of a cash account?

What other violations can jeopardize a cash account?

How to cash in a margin account

Which account wins in margin vs. cash account?

How do you get started day trading part-time?

When is the best time to trade?

What is a good day trading strategy?

How much money do day traders need to start?

What equipment does a day trader need to work from home?

Why is there a resurgence in day trading stocks?

Sports betting drought leads to day trading increase

What are the benefits of day trading?

Zero-commission apps lead to more day trading

Airlines rebound with new day traders

Financial advisors cheer new growth in day trading stocks

What are the risks of day trading?

Financial experts warn about day trading inexperience

Mark Cuban cautions about day trading boom

Day trading rarely leads to profits

What advice do day traders give?

Discipline is key to day trading stocks

How much do day traders make?

How does day trading at home compare to working from a firm?

How does day trading at home compare to other work-from-home jobs?

How do day traders find the best stocks?

1. Apple

Financial experts rate Apple as a buy

Charts show Apple stock a top pick for day traders

2. Facebook

Financial experts bullish on Facebook stock

3. Tesla

Some analysts bearish on Tesla stock

4. Microsoft

5. Roku

Analysis and patience key to day trading from home

Where to Find Your Buying Power Limits

How Much Can You Borrow on Margin?

SEC Limits

Maintenance Margin Requirements

Maintenance Requirement Example

Calculating Day Trading Buying Power

Buying Power for Different Markets

Options

Forex

Futures

Risks of Trading on Margin

How Can Tradingsim Help?

External References

What is Margin?

Improper Use of Margin

#1 – Have a Better Understanding of Margin Maintenance Requirements

Example of Special Margin Requirements

#2 – Know the Margin Requirements for All Open Orders and Positions

#3 – Use Trailing Stops or Stop Loss Orders to Avoid Margin Calls

#4 – Scale Into Your Positions

#5 – Don’t Trade with Margin