Trading on Margin

Margin trading can be a useful tool for traders looking to increase their buying power and take on larger positions. By borrowing money from their broker, traders are able to trade in larger sizes and potentially amplify their returns. However, it's important to keep in mind that margin trading also increases potential losses.

Day trading, on the other hand, involves buying and selling stocks multiple times in a single day in an attempt to capitalize on short-term price movements. While this strategy can lead to quick profits, it is also very risky as it is heavily dependent on stock price fluctuations on a single day and can result in significant losses in a short period of time.

Margin and Day Trading

Buying on margin is a technique that allows traders to trade even if they don't have the full amount of cash available. By borrowing money from a brokerage firm, traders are able to buy more than they have in cash, with the difference being paid back with interest.

When this method is used for day trading, the risks are even greater. While there is the potential for high returns due to the increased risk, there are no guarantees.

The Financial Industry Regulatory Authority (FINRA) defines a day trade as the buying and selling, or selling and buying, of the same security on the same day in a margin account. This definition also includes short selling and purchasing to cover the same security on the same day, as well as options.

Day traders can be classified as "pattern day traders" if they make at least four trades in five business days, provided that they meet one of two criteria. These rules and requirements are set by the Financial Industry Regulatory Authority (FINRA). Pattern day traders are subject to different margin requirements than those who only occasionally engage in day trading. It's important to understand these terms and the regulations surrounding them when considering day trading as an investment strategy:

1. The number of day trades is more than 6% of his total trades in the margin account during the same five-day period.
2. The person indulges in two unmet day trade calls within a time span of 90 days. A non-pattern day trader's account incurs day trading only occasionally.

If a non-pattern day trader meets any of the criteria mentioned above, their account will be reclassified as a pattern day trader account. However, if a pattern day trader's account goes 60 consecutive days without executing any day trades, it will revert back to a non-pattern day trader account.

Margin requirements

To engage in margin trading, investors must first deposit a sufficient amount of cash or securities that meet the initial margin requirement with a brokerage firm. According to the Federal Reserve's Regulation T, investors can borrow up to 50% of the cost of their purchases through margin, with the trader responsible for providing the remaining 50% as the initial margin requirement.

Maintenance margin requirements for pattern day traders are higher than those for non-pattern day traders. According to regulations, a pattern day trader must maintain a minimum equity of $25,000 (or 25% of the total market value of securities, whichever is higher) in their account. For non-pattern day traders, the requirement is $2,000. Each day trading account must meet this requirement individually and cannot rely on cross-guarantees from other accounts. If an account falls below the required minimum equity level, trading will not be permitted until the account is replenished.

Margin call

If the balance in your account drops below the minimum required to maintain your current positions, your brokerage may issue a margin call, which requires you to either deposit additional funds or close out some of your positions in order to bring your account balance up to the required level.

If you fail to meet the margin call requirements, your brokerage firm has the authority to sell off any of your open positions without your permission in order to bring your account balance up to the minimum level required. The brokerage firm has the discretion to determine which specific positions to liquidate.

In addition to potentially selling off your positions, your brokerage firm may also charge you a commission for the transaction(s) involved in this process. You are held responsible for any losses incurred as a result of these actions, and the brokerage firm may sell a sufficient number of shares or contracts to exceed the minimum margin requirement.

Margin buying power

For a pattern day trader, the buying power is calculated as four times the excess of the maintenance margin from the previous day's close of business.

For example, if an account has a balance of $35,000 after the previous day's trades, the excess amount above the minimum requirement of $25,000 is $10,000. This would give the trader a buying power of $40,000 (4 x $10,000). If the buying power is exceeded, the trader may receive a day trading margin call from their brokerage firm. A margin call must be met within a five-business day period. During this time, the buying power for day trading is limited to two times the maintenance margin excess. If the margin call is not met within this timeframe, trading will only be permitted using the cash available in the account for the next 90 days or until the margin call is satisfied.

Example of Trading on Margin

If a trader has $20,000 more than the maintenance margin requirement, their day trading buying power is calculated as $80,000 (4 x $20,000). If this trader then buys $80,000 of EEE Corp at 9:45 a.m. and $60,000 of ABC Corp. at 10:05 a.m. on the same day, they have exceeded their buying power limit.

Even if they sell both of these positions later in the day, they will still receive a day trading margin call the following day. However, the trader could have avoided the margin call by selling EEE Corp before purchasing ABC Corp.

Summary

Day trading with margin carries a high level of risk and is not recommended for inexperienced traders. Even those who have experience with day trading should exercise caution when using margin. While margin can provide traders with increased buying power, it is important to use it responsibly in order to avoid significant losses.

One way to reduce the risk of margin calls and the need for additional funds is to adhere to the limits set for your margin account. If you are new to day trading, it is advisable to avoid using a margin account until you have gained more experience.

MA Profit and trading on margin

The trading technique of MA Profit does not incorporate any leveraged trades. Our AI-based trading models have been trained for an optimal risk/profit ratio and are using purely spot positions.