Margin anyone?
I've never used margin (unless you count the extra money from school loans that I choose to trade). I'm considering it now, but I'd like to get some opinions out there from people if you have. If you'd care to post your experience here, please do!
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8 comments:
Hi Scott,
I'm currently using some margin. As with everything else in life, margin has its pros and cons. One pro as you may know is that it extends your buying power. This can be extremely useful in a 1st stage bullmarket. One major con is that margin acts like a double-edged sword. The extra leverage and exposure that it gives you can be used against you if your stocks or the market turns sour. A simple cash loss can become a substantial one on margin. You have to be able to cut your losses much sooner with margin if your trade goes against you. The best advice that I can give you is to skip the margin for now. Initiate margin in your account when JMHO
Thanks Nick. I continue to be amazed at your high profitability picks. What the heck does JMHO stand for?
I traded on margin for about a year and it didn't work for me. I trade microcaps with no stops, which results in lots of volatility. I have been though a number of 30% drawdowns and in my margin account that turned into a 60% drawdown. That was past my comfort limit and I don't trade on margin any longer. If I started trading a system with lower volatility I might reconsider.
JMHO=Just My Humble Opinion..
I have just started using margin myself. I do not go past 10% of my account value. I usually put in a bunch of buy ans sell trades at night (since I work and cannot monitor the market). It lets me get into positions when I want, and the sells balance it out eventually. It all evens out since I will have excess cash in my account at times as well (money market interest offsets some of the margin interest).
I do not rely on it though. Especially in this type of market that is trading up on bad news hoping the fed will save it. It doesn't make sense to me. Maybe after the holiday season, and the market looks more steady, i will use margin more.
I use margin judiciously - primarily to avoid selling something that I might be able to squeak some gains out of if I held on.
The situation when I would use margin is the following - things are good and I'm near 100% invested. Some stocks fall off my screens and there are new ones added to screens that look compelling. I need to sell something to have funds to buy the new ones. What I like to do is put a very tight stop loss on the stocks I plan to sell and then use margin to buy the new stocks.
The advantage is if what I planned to sell has a gain, I pocket it and I'm in on my new buys. I keep a very tight trailing stop loss on what I planned to sell - it will eventually execute and then I'm no longer using margin. I sometimes get a few extra % gain out of something I planned to sell using this method.
It's what I consider a conservative use of leverage that seems to work for me.
Just saw your post that you may probably start using margin. I just want to know the reason, is it because of short of cash ? how much is your total portfolio including cash ? I am new trader, and want to start stock market trading, and I do not have much cash and would like to know if margin is way to increase cash.
I wouldn't recommend margin to anyone who is strapped for cash or for new traders. Margin can compound your losses, and it's very hard to enjoy trading when you are losing lots of money. I would pretend to trade for a while if I had less than $10,000 to trade. There are a lot of websites that let you pretend. I use Smartmoney portfolios. Their free and they track performance which makes it easy to see if you have the knack for making money.
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