Answer to Reader Question – Why I don’t prefer margin trading and why you should also avoid trading with margin money.
The discussion with Sudhip in comments landed on a topic where he asked me why I don’t prefer margin trading. I explained and gave an answer to him in comments and I think I should share the same here as post for all my readers.
I don’t use margins because I hope for the best but remain prepared for the worst. Taking the same example from Sudhip’s comment for using a margin of 20 times. Let us say we have 1L or 100,000 in a trading account. For day trading you can actually buy securities worth of 20L or 2000,000
Say on 20L you have a target of 4% and a stop loss of 2% of your purchase price.
The day you make profit you gain 80,000 Rs but say if you hit the stop loss you loose 40,000 Rs out of your 100,000. Make sure you are prepared for a stop loss trade as well where 2% in either direction is very possible and probable.
I always trade at the most of 1/3rd to 1/4th of my net asset in the account 25,000 only. Even if I hit a stop loss of 5% I would be losing less than 2% of my trading assets.
So next time somebody offers you more margin remember that it is a product that gives you more disadvantages than advantage. Share your views about trading with margins in comments below.
yes he is sure. i have lost huge money in margin trading.plz friends be ware of margin trading.
if not margin trading..how do you guys to intraday trading. I am new to this and have just started, using margin plus trading for ICICI direct.
I completely agree with Shabbir.. Actually I always used my 25%-30% of my tradeing Capital..e.g If I have Rs 50,000 as trade capital then I do long/short of 2 lots MiNifty.
Regards
Kartick
25-30 % of investment capital for each trade is ideal for safe trading.
Hello Shabbir
After reading your e-Book I can now tell about the trend of a stock if live charts of that stock is available.I have found the chart in yahoo finance but this is not live .It is 15 minutes late during market hour.Now tell me how to earn money using your technical analysis knowledge.Where do I get the live chart ?
Regards
Surai Mardi
Surai, thanks for your wonderful feedback and if you can add the same in the testimonial section here.
Now about your query the best source of live data is from your broker’s application. Where you have trading account?
Dear Shabbir
My trading account is with Adityabirlamoney .But I don’t see any live chart as Yahoo finance is giving.However Yahoo finance charts are 15 minutes late.So I have to guess what will happen 15 minutes later.Please suggest.
Thanks again for responding
Surai Mardi
Ask them if they have any application for trading and I am sure that application will have some charts.
Dear Shabbir,
For the past few months I’ve been trying my luck in margin trading and making as well as losing some money. Generally I can sense the overall sentiment of the market and take long or short position on a particular stock present in Sensex 30 but unfortunately that particular stock performs against the market trend (i.e. price falls when entire market is going up and price rises when the market is down). Hence I’d like to know is it possible to trade the entire index (either Sensex or Nifty) rather than a single stock.
I know you don’t prefer margin trading but kindly help me in this regard.
Looking forward for your reply.
Regards,
N.Manoj Kumar
Manoj, you can trade in Nifty but not in Sensex.
More from an understanding perspective on how to find stocks to trade in for profits, my personal route is to study basis technical indicators.
One indicator I rely upon is Stochastic RSI. The Stochastic RSI combines two very popular technical analysis indicators, Stochastics and the Relative Strength Index (RSI). Whereas Stochastics and RSI are based off of price, Stochastic RSI derives its values from the Relative Strength Index (RSI); it is basically the Stochastic indicator applied to the RSI indicator…
Stochastic RSI Buy Signal
Buy when the Stochastic RSI crosses above the Oversold Line (20).
Stochastic RSI Sell Signal
Sell when the Stochastic RSI crosses below the Overbought Line (80).
Please note above is ONLY my personal opinion.
Great article.. Greed always leads to loss and disappointment and when you go for margin trading, u expect more profit in less investment.
The best way to do is buy scrips under BTST. you get upto 7 days time to pay.
Shabir, could you suggest few stocks that are the best and most ideal for day-trading(intra-day)? I look for more volatile stocks that are ideal for day trading to make profit on daily basis.
Awaiting for response
Salm, I don’t prefer suggesting stocks but what I recommend is helping people understand how to find such stocks.
But if margin is used correctly, it is very useful.
With margin exposure given up-to 50 times too, just a 2% can double our INTRADAY capital…obviously this capital has to be treated as High-risk capital, but the profits can be 80% or more in some trades!
Of course working with margin means I use STRICT SL…and it works well 🙂
But I agree this is NOT for newbies or beginners…or one who has no risk-appetite!
Not sure if I get your idea. You are only seeing the returns without analyzing the risk. As the profit can double then stop loss of even 2% means you are all gone from market.
Shbir,
Nicee ideas.
Thre are few stocks that works well(not blue chip or sensex scrips) when do day trading becasue of its volatality. These stocks are not ideal for holdings instead only for buy and sell on daily basis.
I was asking about that. Active traders will have all those favorite trading stock list. These stocls are mostly mid and small companies.
Hope you got waht i was asking about. Thanks
Still I would not risk my complete asset into those stocks. Any stock if I know it would have the direction I intend it to go, I risk more but not more than what I can loose. The mas position I take is 100% of my asset but not 101% of my cash levels.
Hi Shabbir,
Yes, your thoughts on Margin trading are true, nonetheless from the very little experience / tenure I have in trading, what i have gathered is to stricly follow upon the below self made rules…
For going short.. (Opp for long)
1. Entry Rate: If Less than Previous close – Enter or If Less than Previous Low – Best
2. Last Day High + 0.25%
3. Observe Intra-Day Charts take support from 2 min. 5 min & 30 Min. If reversal seen – Exit
Technical Indicators which i feel is a good indicator is Stochastic RSI.
Regards
Bhanu
If they are working for you, it is the best thing though I am not a fan of generalizing things like 0.25% up and down from last day’s high.
I would like to differ here. Margin trading can be beneficial if you use it at special situations to make use of intra-day volatility. Sometimes stocks overreact to news by either falling too much or rising too much.You can sense that it will correct and it makes a good trade.There,using the margin trading will increase your profits tremendously.But as I said, this should be used only for special situations. In normal trend, one should avoid margin trading anyway.
Regards, vivek.
Dear
From this example given by you, everybody should strictly follow this rule i.e. avoide margin trading so as to minimize the probable loss due to wrong expectations or for any other reason. Everybodies ultimate intension is to make profit and not to loose any penny.
Sudhakar
Yes very true Sudhakar. Actually sales people when they say you can have the power of 20 lakh by just having 1 lakh as money in your account, people get really excited about it.