Page 77 - THE MARKET WHISPERER

THE MARKET WHISPERER 75

Summarizing: the disadvantage of margin is the interest it bears beyond

one day’s trading and the risk of losing four times more than you might

have lost if trading without the margin. In actuality, the risk is no higher,

as we will learn later, as there is little significance to the sum with which

you’re trading as long as you use stop orders that limit the amount any

transaction can lose. The advantage of margin is that you don’t need to

make a much larger deposit in order to trade with higher sums. In light of

the dangers inherent to using margin, day trading rules prevent brokers
supervised by American regulations to provide margin greater than a 4:1
ratio on any single trading day and a 2:1 ratio for more than one day. In
fact, the condition for being allowed to use margin is that you are required
to deposit a minimum of $25,000 in your account. In any case, even if you
do find a way to reach higher margin, as new traders I would advise you
to make do with the 4:1 ratio. A too-high margin might go out of control in
risky situations where you feel you absolutely “must have” a certain stock.

That’s precisely when it’s best to take a deep breath and minimize the risk.

A reasonable margin prevents mishaps of this kind. In short, be satisfied

with a little less and you will save a great deal.

How Much Should be Deposited in the Trading
Account?

As noted, United States regulations prevent day trading to people with less
than $25,000 in their accounts. Day trading is defined as making more than
four transactions over five successive trading days. US citizens wishing to

operate as day traders must deposit that minimum figure. In actuality, the

day trader must deposit more, because the very first loss that brings the
total below $25,000 will limit the trader to no more than four transactions

over five successive days. This rule does not apply, however, to citizens of

other countries on condition that they operate via brokers whose center of
activities is not within the US, and on condition that the broker is regulated
outside the US.

US brokers offer their services mainly to US clients, and therefore do

not match the attitudes of citizens from other countries. In other words,
even if you aren’t a US resident, you will still suffer the limitations placed
on US citizens and will need to deposit a minimum of $25,000 to trade

daily. With this in mind, I would recommend that if you choose to open an
account with a US broker, you deposit at least $30,000 so that any losses

you may absorb will not limit your activities.