Here are some comments from an '02 thread:
Trading âºâº how do YOU use margin?
I think the thread has some great content.
Quote from Rigel:
There is at least one circumstance in which it isn't prudent to use margin. Scalping and margin don't go together. A trading halt with a 50% gap in the wrong direction on a single full account position at 5:1 margin could put you out of the game and into huge debt in the blink of an eye, and it will happen sooner or later. Scalping single positions with margin is very unwise IMO.
Quote from daniel_m:
Daytraders (the kinds i know) normally risk in the region of 10-50 cents per trade. As such, it is quite normal for daytraders to use the full 4:1 margin on a single position. Many (prop traders) use a lot more than that, and have multiple positions on aswell. The key factor is how much of their account they are risking; if it is within reasonable risk management parameters, there is no problem with the 'obscene' levels of margin.
As to Rigel's suggestion that it is STILL risky (intraday margin) because a stock WILL get halted (it WILL happen to you): I'm not sure what the rules are for halting stocks, but I assume that they are only halted if they are falling. In that case the risk only exists on the long side. If a stock is falling precipitously, it is pretty dangerous to be buying it regardless of whether it'll be halted or not. (even though some people do...and make good money at it)
Quote from Traden4Alpha:
P.S. RE HALTs: Although I am sure that many halts occur after a decline in stock price that might let a skilled trader exit before the halt, I suspect that some of the worst halts happen so quickly and under such an order imbalance, that most daytraders would be caught holding positions. Imagine if 9/11 had occurred at 10AM, instead of before market open.
Quote from Traden4Alpha:
Ugly Issue 5: Freak Losses
As darkhorse points out, freak losses hurt the aggressive user of margin more than they do the non-margin trader. All of these sims assume that the trading system obeys a simple statistical law for profit and loss (the Monte Carlo used normally distributed returns, the Pascal triangle sim used binomial returns). Neither sim allowed for freak losses due to price gaps, trading halts, order imbalance, typos on order entry, broker failures, computer failures, etc. Although one could argue (and hope) for freak wins, I suspect most ET traders would agree that freak losses outnumber and outweigh freak wins. Again, this issue is another strike against using margin.
Quote from vulture:
I was re-reading a few of the older posts on this thread where someone said that the only instance where you would most likely experience a catastrophic price shock(while simultaneously overleveraged) would have occurred on the downside...
But the problem is that since about 1998, I would argue that the majority of price shocks have occurred on the upside...There were at least two significant upside price shocks in 2001 alone...The price shock which occurred in 1998 was extremely swift and occurred one day before an options expiration, thus ensuring that all the gamma players were extremely exposed...
The interesting aspect of these multiple price shocks is that the skew still does not reflect this risk on the upside...Whereas following the 1987 stock market crash, all index options traded at a perpetual skew with a graduating scale of higher and higher IV's the further OTM...I have not seen the same affect in the call side...So one could argue that the majority of short term players(ie futures scalpers, index options traders, market makers, etc,etc) have much greater exposure to upside catastrophes predicated on the fact that there is less margin for error when making big bets against the upside and then having the shock go the unexpected way...
