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.
