Margin trading is an excellent way to use leverage when investing in the stock market. However, not everyone uses it simply because not everyone is given permission to use it. If you are one of the lucky ones who have gotten permission, you better do margin trading properly.
Like any kind of trading strategies, learning some of the best tricks of the trade always goes a long way. Here are some of the most useful tips for Forex Trade you to be successful in margin trading.
Know the Interest Rate
Like any other kind of loans, there’s an interest rate you need to pay for what has been borrowed. In terms of stock trading, Live Trading Account any online stock broker can normally charge around 8 percent a year interest on the borrowed funds. Sometimes the rate varies on the total portfolio value. If you understand the interest rates, you get a higher chance for better investment success.
Buy incrementally, not in one swipe
It’s a rule of thumb for rookie investors: you should buy over time into a position and not in one large order, depending on the portfolio size.
You can try to take half of the position first, then wait and find some headway to the upside. You can then add to it from there. This will help you keep your risk at the lowest level until you get a stronger fighting chance of an overall profitable trade.
Know the Rules
Before you take on the job of margin trading, it’s imperative you know what you’re doing and you understand the rules of the game.
An ordinary trader should be able to attain 100 percent margin on his or her account, though you can find ways to extend this. If the SEC declares you as a pattern day trader, you may be able to borrow more than 100 percent of your account.
You just have to read the broker guidelines very carefully before you make your first trade on the margin.
Avoid Margin Calls
Investors never get excited to have a margin call on their account. A margin call demands the investor to deposit more funds on his or her account to cover losses on margin or sell a position completely.
Each position initiated will have a specific price level, and when you reached that level, a margin call will be made. Dig deeper and try to understand better this price area before buying.
Use Stop Loss Orders
Stop loss orders can help stop margin calls from taking place and save an investor from incurring huge bad losses.
When you’re trading with full 100 percent margin, your account is exposed in both huge gains and huge losses, like to sides of the same coin. Stop loss orders can serve as your insurance policy, so you should use them.
Set Aside Backup Cash
Probably the worst scenario would be to lose your entire account, and maybe go into heavy debt because of it. If you keep some cash reserved on the sidelines to serve as your backup funding, you can somehow prevent these worst scenarios from happening.