Margin: 101

Well, we’ve arrived at the end of another year and, despite losing some momentum in recent weeks, I was able to hit a big milestone in my trading career. 2018 marks the first year since I started trading that I was able to break $500,000!

I’m extremely hyped to have been able to cross the finish line on my half-million goal. I've averaged about $2,100 a day this year, and I’m hoping next year will prove to be even more successful.

Since we’ve come to the last couple trading days of the year, I been taking this time to talk a little about some alternative approaches to trading I and other day traders use to maximize returns and minimize loss. I’ll try to assess some of the pros and cons to each, but I’d encourage more in-depth research into each before experimenting with them, even in practice. There’s no use getting frustrated with something you don’t completely grasp.

The use of margin is another familiar, or at least easy-to-understand, trading practice that has retail traders using borrowed capital to buy equity. Having more equity increases the trader’s buying power and allows them to realize higher returns and exercise better risk management. Although, like any loan, borrowing on margin also carries interest that the trader must return at a predefined rate.

Of course, this is all premised on trading borrowed money, and all of the risks that entail. If, say, someone overextends their margin and executes a losing trade, they can get margin called in which the broker they borrowed from can demand all or part of the loan back. If that doesn’t happen, they can start selling off the equity purchased with their money, which can mean an even greater loss for the trader.

To mitigate this kind of risky margin trading, the Federal Reserve has implemented regulations to make certain traders don’t do something stupid with their borrowed funds. There are a lot of finer points to these rules, but the most pertinent one is that traders can only borrow as much capital in their margin account as they have in their cash account, This means that they can only borrow a maximum of 50 percent of the funds used to buy equity, and, should they exceed that by losing money on a trade, they then need to replace the missing funds or else enter into the aforementioned margin call.

Again, Margin trading, like the other approaches and tools for trading I’ve covered this month, are useful, and even highly profitable, when a trader understands how to best use them. Still, even beginner traders should familiarize themselves with the full spectrum of trading options in case they get into a rut with vanilla day trading.

I hope you all have happy and safe new years celebrations. I’ll see you again in 2019.