Day Trading on Margin

day trading on margin
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Using margin to day trade means using leverage to trade with more money than is currently in your brokerage account. This greatly enhances your ability to trade, but also carries risk. Trading on margin is an integral part of successful day trading, but it is crucial to know the ins and outs before you get started. SureTrader provides all the tools you need to learn how to day trade and then move on to day trading on margin.

FINRA and Pattern Day Trading

Under the U.S. Financial Industry Regulatory Authority (FINRA) rules, pattern day traders include “any margin customer trading … four or more times in five business days, provided the number of day trades are more than six percent of the customer’s total trading activity for that same five-day period.” Under FINRA regulations, pattern day traders must maintain minimum equity of $25K on any day that the client day trades, and this necessary minimum equity must already be in the customer’s account before any day-trading activities. Should the account fall below $25K, the pattern day trader cannot trade until the account once again holds the $25K minimum level of equity. The pattern day trader rule pretty much rules out all but the higher equity traders. The lower level day trader can’t participate.

At SureTrader, clients are not subject to pattern day trading rules. That is because we are licensed and located in The Bahamas, and fall under the regulations of the Securities Commission of The Bahamas. We execute all of your trades in a principal capacity as Swiss America Securities, Ltd., acting as your counterparty.

How Margin Works

Trading on margin involves borrowing money from the brokerage to pay for part of your trade. You are, in effect, taking out a loan on your account holdings. The amount of money in your account fluctuates, and so does the amount you can borrow.

The downside of day trading on margin is the margin call. Such calls occur when the maintenance amount of money in the brokerage account falls beneath its minimum. There is no longer a literal phone call from the broker as happened “back in the day.” Today, all such notifications are electronic. At that point, you must add sufficient funds to your account so that the maintenance margin is met. You don’t want to receive a margin call, and that’s a goal for everyday trader.

Using Margin with Discipline

While you can make more money day trading on margin, you also have the potential to lose more. That’s why it is essential to become a disciplined day trader. That means you are working with your head and not your emotions when trading. Before executing any trade on margin, you must have a strict strategy. This strategy includes an enter and exit price – stick to it. There is one more element – the stop price. While a stop, or escape price, is generally considered a “worst-case scenario,” it is necessary when day trading to minimize any losses. The stop price kicks in at a predetermined amount, so your losses are limited. A rule of thumb is setting the stop price at 10 percent below your purchase price.

When using margin, you must pay attention to the price at all times. That’s true of any type of day trading, but knowing you have borrowed money at risk keeps you concentrated. Before you start trading on margin, work extensively with SureTrader’s demo program to develop trading strategies and hone your skills. Only when you feel confident in making paper trades it is time to use your own money to make real-life trades. When you have mastered real-life day trading, it’s time to consider day trading on margin.

Margin Trading Rewards

Now that you have an idea about the risks of day trading on margin, it’s time to discuss the potential rewards. With the right stocks, strategy, charting and technical analysis – and yes, luck – you can make a lot of money trading on margin. Say a stock you bought with 50 percent of your own money and 50 percent on margin for 20K rises 25 percent, for a total of $25K.  Cash in, and after paying back the 10K you borrowed, you’re left with $15K, minus interest and commissions. In round numbers, you made $5k on that transaction, or 50 percent of your own investment – although the stock itself rose “just” 25 percent. That’s why day trading on margin is so alluring. The idea of much bigger payoffs than you could ever manage using solely your own funds becomes a possibility with margin trading.

6:1 Leverage

At SureTrader, day traders receive 6:1 leverage. If you have $10K in your account, that allows you to buy up to 60K in securities. Under FINRA rules, day traders are limited to 4:1 margin, so SureTrader allows you to borrow 50 percent more than FINRA-regulated brokerages. Overnight, or non-day trades, are eligible for 2:1 margin. You must have at least $500 in your SureTrader account to obtain leverage. There are larger minimums based on stock value, with stocks priced under $2.50 per share affected. Certain stocks may have restrictions and the 6:1 leverage does not apply.

Intraday trading occurs between the hours of 9 a.m. to 3:30 p.m. Eastern Standard Time. Securities held past that time are considered overnight trades.

The SureTrader Advantage

Not only can you obtain greater leverage in your margin account with SureTrader than with competitors, but we offer discounted margin interest rates based on your margin account balance. Make sure you understand all the risks and rewards of day trading on margin. An educated day trader is our best client. With no pattern day trading, a $500 account minimum and 6:1 leverage, you’ll soon recognize the SureTrader advantage when it comes to day trading on margin.

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