Why Not Use Margin?

C

Corso482

I always hear don't trade with money that's not yours etc.

But, if you're using 2/1 margin, you're really not touching the borrowed money unless your losses exceed 50%, right?

It's like this-- you have 10K in trading capital. You make a deal with someone to give you another 10K. If your losses reach 10K, you stop trading as to not risk their money, i.e. 50%. But any profit you make on their 10K you get to keep (less interest). Sounds like a good deal to me...


Let's say you are swing trading, putting 1/10 of your capital into each position, using 5% stop loses...I doubt all of a sudden one day you'll wake up to find your entire acct. down more than 50%. And if you really want to be safe, stop trading if your losses reach 40%, worst case scenario.

So, why not use 2/1 margin swing trading if you use reasonable position sizing and resolve to stop trading should your acct. lose 50%?
 
Quote from Corso482:

It's like this-- you have 10K in trading capital. You make a deal with someone to give you another 10K. If your losses reach 10K, you stop trading as to not risk their money, i.e. 50%. But any profit you make on their 10K you get to keep (less interest). Sounds like a good deal to me...
More...

That is a great deal, but how are you going to convince someone to give you 10K when there is also no upside for them? When I first started trading years ago it was with 100% other people's money, but they got to keep 50% of all the profits. And I was very happy about it because I wouldn't have been able to trade otherwise. I just don't know anybody that would loan you 10K to trade with and not want a cut of the profits.
 
Quote from TraderJimR:



That is a great deal, but how are you going to convince someone to give you 10K when there is also no upside for them? When I first started trading years ago it was with 100% other people's money, but they got to keep 50% of all the profits. And I was very happy about it because I wouldn't have been able to trade otherwise. I just don' tknow anybody that would loan you 10K to trade with and not want a cut of the profits.
More...

My 10K scenario was an analogy for margin. There's no actual person. Using 2/1 margin and stopping at 50% loss is the equivalent of that deal...or so I'm thinking. Where am I wrong?
 
Quote from Corso482:


Where am I wrong?
More...

They key questions a trader needs to answer are:

1. Am I completely confident with my system and comfortable with my margin positions, and do I really have the experience to make this judgement?

2. Have I thought through what my account situation would be if I awoke to another 9/11 or an '87 crash, or if my major position took an overnight hit? Because these scenarios can and will happen again.

3. Am I prepared to handle a margin call in the event of a worse case scenario?

4. Is using margin really critical to reaching my trading objectives?

If any of these questions cause discomfort, then a trader should not be using margin.
 
Are you trying to get people to dissuade you from using margin? Perhaps you could be a little clearer about the purpose of your original post.

I think most people here will agree that margin is a wonderful tool if used properly. If you habitually abuse your margin power you will eventually regret it. It might not happen the first, second,or even tenth time but eventually poor margin related decisions will catch up with you. If you use your margin properly then you have far less to worry about.

Think of it like driving a car or using a chain saw. Both the car and the saw are useful and make our lives easier. When we ignore the inherent risks associated with these tools we drive off a cliff like Toonces the driving cat and the chainsaw cuts off our....
 
Quote from Lightningsmurf:

Are you trying to get people to dissuade you from using margin? Perhaps you could be a little clearer about the purpose of your original post.
More...

Not really trying to get people to dissaude me. I just want a better understanding of it.

The reason the issue came up is that my mother actually agreed to do the deal I posted originally (except it was 8k). I got to thinking that using margin is essentially the same thing, only I would have to pay interest instead of splitting the profits (she wouldn't actually make me split the profits...I know her).

If possible I'd rather use margin than my mother's money. I think it would add undue emotional pressure to manage a family's money, at least while I'm still wet behind the ears.

I want to know if I'm wrong to equate margin with the deal I spoke of. What are the differences I'm missing?
 
Quote from Corso482:

But, if you're using 2/1 margin, you're really not touching the borrowed money unless your losses exceed 50%, right?

So, why not use 2/1 margin swing trading if you use reasonable position sizing and resolve to stop trading should your acct. lose 50%?
More...
If you have $10,000, and you use your margin to buy $20,000 worth of stock, you're in trouble as soon as your positions go against you.

By the time your losses reached 50% (discounting margin calls) you would be totally wiped out.

If you use your $10,000 to buy $10,000 worth of stock, you would still be able to make another $10,000 worth of purchases. If you bought $10,000 worth of stock, and it dropped in value 50%, you would still be able to buy another $5,000 worth of stock. In fact, if your stock dropped in half, you could buy $5,000 more (double your position) and if it went back to where you first bought it you would have doubled your money to $20,000.

If you have $10,000, and you use 2:1 margin to buy $20,000, you're in trouble if it moves against you. If you only use it buy $10,000 worth of stock, then you have more leeway. But then, you really haven't used the 2:1 margin, have you.
 
Ok, maybe it would be smarter to stop trading at the maintence margin %, or a little before it, rather than 50% as to avoid margin calls.
 
You must log in or register to reply here.
Back
Top