Forex trading tips usually operate on the premise that the novice trader rarely has the experience, strategies and risk management expertise needed to effectively margin trade. Borrowing money to increase or improve trading results is a risky affair, especially if you don’t have the knowledge to handle the situation.
While the aim of trading is to come out wealthier on the other end, defensive action is the best route forward and will ensure that you remain in the trading game for a lengthier period. Day traders trade a number of times each day, taking small profits off each trade, but a dry spell could wipe out your trading account very quickly.
Day traders do have the option to borrow, and the amount is substantially higher than that of traders with longer holding time frames. The method behind the madness is that short holding periods are less likely to see the considerable losses that those with longer holding periods experience. Rules apply where day trading is applicable, and in order to borrow, trades must be concluded before the day closes or your account will be subjected to automatic liquidation.
Day trader classifications
Pattern day traders are those who carry out more than four trades during a five-working-day period. To be classified as a pattern day trader, the investor would have to fulfill a variety of other trades during the same period of time. However, 6% of the total trades must be day trades. In some cases, the brokerage firm itself might classify you as a pattern day trader for reasons of their own.
Those who do not fulfill any of the stipulations will automatically be reverted to non-pattern day trader status. Your classification does have implications for you as an investor. The minimum equity requirement for pattern day traders is considerably higher than that of non-pattern day traders.
Keeping it real
As a day trader, margin trading requires an understanding that even small fluctuations could have telling effects on your portfolio. Using borrowed money can help you leverage your trades, but without proper trading strategies and risk management strategies in place, you won’t make a profit and will effectively owe the brokerage firm at the end of the day. While it may be your dream to live off your trading earnings, the reality is that without a large capital base, the chances of doing this are slim.
To calculate the capital base required, you need to consider what you would like to earn each month. That figure needs to be divided by the return percentage expected each year. You will be surprised by the figure that results from such a calculation and the money you need to input to make a living trading. Trading is by no means a get-rich-quick scheme.
Margins are not all bad. However, experience is the key factor in the mix. Pushing the limits of expected returns to a comfortable risk level can present rewards. The use of margins may also be a safer option than trading using cash only. The incentive for the investor or trader to opt for a low-to-medium risk strategy is far better than making use of a strategy that carries high risk and may put your securities in jeopardy.
Day trading is not an activity that should be undertaken by beginners or those who have little experience in the trading industry. To achieve levels of success, traders must have systems and strategies in place that are proven profitable. Using low amounts of leverage in this instance can prove safer than cases where no leverage is used but substandard strategies are employed.