Wednesday, January 11, 2017

Basic's of Trading Part 4: Margin, Pattern Day Trader, Account, Commissions



4th in a series of posts on the basics of day trading for beginner traders. Will be archived so can be used in conjunction with trades I post, and my trading plan which doesn't cover the basics. 

Part 4: Margin, Pattern Day Trader, Account, Commissions, More on Mother Market

Margin: Before defining Margin, new traders should avoid the temptation to use margin.  In simplistic terms Margin is when borrow money from your brokerage to finance all or part of a trade. Basically you are given more money to trade with and if you don’t know what you’re doing or inexperienced - more money to lose. But when used properly margin can increase potential returns. The pattern Day Trader can use up to 4x their account in buying power during the trading day. Over night the maximum is 2x from your brokerage to help purchase stock. For example, with a $30,000 trading account, you’ll be given enough buying power to purchase $120,000 worth of securities intraday. Overnight, however, the margin requirement is still 2:1 so the maximum is $60,000. 

What is a Pattern Day Trader: A pattern day trader is a trader that makes four or more round trip trades within five business days and your day-trading activities are greater than six percent of your total trading activity for that same five-day period. So why is this relevant?  To be able to have unlimited day trades, and be approved to use 4:1 intra-day margin, you must maintain a minimum of 25K in your account.  Without this amount you are only limited to three Day Trades over five business days.
Do you Need 25K to Trade?: The obvious  issue is that not everybody can afford to open a 25K+ trading account and have trading privileges...and that is a good thing. New traders should start with a small account and limited trades until your skill and account level gets to the point where you can start to scale up.  

Trading with less than the 25K Minimum: This is the safest method for starting out as a trader.  You are allowed to make three-day trades over a five business day.  This will force you choose only the best setups.  If you see a number of average setups one day, you are more likely to pass on them and wait for a better opportunity on another day. If you stick to $25 per trade risk and lose 10 trades in a row (hard to do) you would only be down $250. Another idea for placing more trades is having a split account. This would give you 6 Day Trades to place over a 5 day period. 

Commissions: When you make a trade you must pay the brokerage firm. Some brokerage’s will offer new accounts free trades for a period of time with a minimum of 5K account. Like any business, yes you need to treat this as a business, there are expenses. Shop around for the best deals. For my IRA I use Think and Swim ( TD ameritrade) so I can access their superior software system for charts and scanning. For day trading my regular account I use Options House for their cheaper commissions.  Check Nerd Wallet for deals, reviews and guidance as they have an article posted on January 6th that needs to be explored in its fullest. I recommend a few times and don’t rush through as lots to uncover.


More on Mother Market:

This video portrays the realization when you gain the respect of mother market through time, practice, study and can recognize high % patterns on a chart with ease. It’s a state of ease as you balance the highs and lows of winning and losing trades by always focusing on the process over  the $. This state of ease is always sticking to your entry point if you miss an entry and the stock runs away without you. This state of ease is sticking to your profit exit point and not getting greedy and holding on for more and ALWAYS sticking to your stop exit point. It’s treating day trading as a business not a hobby.
It’s the understanding the war is over, and that in reality it wasn’t a war with mother market. It was a learning process that gave you the foundation to help propel you to success.



Next Post: your health and trading, Simple Setup using  the Daily Chart and a basic video showing how I scan for candidates and use the charts to filter out daily candidates to trade. 


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Disclaimer

I DO NOT MAKE RECOMMENDATIONS TO BUY OR SELL SECURITIES - I JUST POST TRADES I MAKE OR FIT THE RULES OF MY TRADING PLAN ON A DAILY BASIS. DO YOUR OWN DUE DILIGENCE - YOU ARE RESPONSIBLE FOR YOUR TRADES, INVESTMENTS, AND DECISIONS! ALL CHARTS COURTESY OF TRADESTATION, SCHWAb & TD AMERITRADE