Page 76 - THE MARKET WHISPERER

74 PART 2 - Day Trading And How To Get Star ted

mere cents? When you sleep on a margin of 2:1 and the stock price drops
more than 50%, this is the stage in which you are losing not only your own
money but that of the broker too. The broker’s job, of course, is to prevent
risks of this kind. This is why brokers maintain a risk department whose
job it is to keep tabs on your account and warn of potentially hazardous
situations. In actuality, it rarely happens that a client loses more than the
amount in his or her account.

Does margin sound risky? To experienced professionals, not at all.
They will never endanger more than a pre-defined sum of money. This
sum, which they are willing to risk, will have nothing to do with margin.
As we will learn further on, they use stop orders as protection, and plan in
advance the maximum dollar loss they are willing to absorb. They never
absorb losses of tens of percent, and never endanger their trading account.
If you remain disciplined and operate according to the rules, you will learn
as we progress, and margin will become a gift at your service when wisely
used. By contrast, if you are not sufficiently self-disciplined and have a
tendency to gamble, beware!

Brokers are at risk and do not share in the profits you can make from
margin: so why would they bother to provide you with margin? There are
two main reasons. The first is the fact that interest is profit. When you buy
on margin beyond the trading day on which you purchased the stock, you
pay interest, from which the brokers make a profit. The second reason is
that the greater the sum of money accessible to you, the more probable
it is that you will execute more transactions with greater volume. Why
would you be happy with buying just 200 shares if you can profit from
buying 800? In short, margin benefits both sides: the trader can put in just
one quarter of the amount needed and enhance his or her potential on
each trade by double or quadruple, while the brokers benefit from greater
volume of activity which creates more commissions.

As a day trader, I’m very active within the day’s trading hours and
often use the entire margin capability available to me. I tend not to use
the full margin available for purchasing one stock, but for several stocks
simultaneously purchased: for example, I might buy stock A without any
margin, identify a good opportunity, and buy stock B with margin, and
possibly even stock C and D until my money’s full margin is maximized.

When I sleep on a stock for a range of several days, it will usually be after
successfully taking a partial profit of at least 75% of the shares I bought.
The same would apply, too, if I slept on four different stocks: I would use
almost no margin.