Guide to Margin Day Trading

Margin trading is highly speculative. You should only try margin trading if you fully understand your potential losses and have developed a reliable risk management strategy.

Margin allows traders to amplify their purchasing power to take advantage of larger positions than their cash positions allow. By borrowing money from your broker for larger-scale transactions, traders can expand returns and potential losses.

Intraday trading involves buying and selling the same stock multiple times during trading hours in order to quickly profit from stock price changes. Intraday trading is risky because it depends on the stock price fluctuations on a certain day and may cause significant losses in a short period of time.

Key points

  • Margin trading allows you to borrow funds from your broker to buy more stocks than the cash in your account. Margin trading also allows short selling.
  • By using leverage, margin allows you to magnify your potential returns and your losses, making it a risky activity.
  • Margin calls and maintenance margins are required, which may increase losses when the transaction deteriorates.

Margin and day trading

Margin buying is a tool that facilitates transactions even for those who do not have the necessary cash on hand. Margin buying enhances the purchasing power of traders by allowing traders to buy in larger quantities than cash; the difference is filled by a brokerage company at interest.

When these two instruments are combined in the form of margin day trading, the risk will increase. According to the motto, “the higher the risk, the higher the potential return”, and the return can be multiple. But please note: there is no guarantee.

The Financial Industry Regulatory Authority (FINRA) rules define intraday trading as “buying or buying the same securities in a margin account on the same day.” Short selling and buying the same securities and options on the same day also fall within the scope of intraday trading.

When we talk about day trading, some people may only indulge in it occasionally and have different margin requirements from those who can be labeled as “modular day traders.”Let us understand these terms and margin rules and requirements in the following ways Financial Industry Regulatory Authority.

The term model intraday trader is used for people who perform four or more intraday trades within five working days, provided that one of the following two situations is true:

  1. During the same five-day period, the number of transactions on the day exceeded 6% of his total transaction volume in the margin account.
  2. The person indulged in two unsatisfied day trading calls in a 90-day time span. The accounts of non-model intraday traders only occasionally conduct intraday transactions.

However, if any of the above conditions are met, the non-model day trader account will be designated as the model day trader account. However, if the account of the model intraday trader has not conducted any intraday transactions for 60 consecutive days, its status will be reversed to the non-model intraday trader account.

Margin requirements

To conduct margin trading, investors must deposit sufficient cash or qualified securities that meet the initial margin requirements to the brokerage company. According to Fed Regulation T, investors can borrow up to 50% of the total purchase cost as margin, and the remaining 50% is deposited by the trader as the initial margin requirement.

The maintenance margin requirements of traders on morphological days are much higher than those for traders on non-morphological days. The minimum equity requirement for model day traders is US$25,000 (or 25% of the total market value of the securities, whichever is higher), while the minimum equity requirement for non-model day traders is US$2,000. Each account marked as a day trading account must meet this requirement independently, rather than by cross-guaranteeing different accounts. If the account is lower than the prescribed amount of USD 25,000, no further transactions are allowed until the account is recharged.

Margin Call

If your account is lower than the maintenance margin amount, a margin call will occur. A margin call is a requirement that your broker requires you to add funds to your account or closed positions to restore your account to the required level.

If you do not meet the margin call requirements, your brokerage company can close any open positions in order to restore the account to the lowest value. Your brokerage company can perform this operation without your approval and can choose which positions to liquidate.

In addition, your brokerage company can charge you trading commissions. You are responsible for any losses suffered during this process, and your brokerage company may liquidate enough stocks or contracts to exceed the initial margin requirement.

Margin purchasing power

The purchasing power of the trader on the pattern day is four times the maintenance margin excess at the end of the previous day’s transaction (assuming an account has 35,000 USD after the previous day’s transaction, then the excess here is 10,000 USD, because this amount has ended and is higher than 25,000 USD Minimum requirement. This will provide a purchasing power of 40,000 USD (4 x 10,000 USD). If this value is exceeded, the trader will receive a margin call for day trading from the brokerage company.

There are five working days to satisfy the margin call. During this period, the purchasing power of intraday transactions is limited to twice the maintenance margin excess. If the margin requirements are not met within the specified time period, further transactions can only be carried out with cash available within 90 days, or until the requirements are met.

Margin trading example

Assume that the trader’s margin amount is more than 20,000 USD more than the maintenance margin amount. This will provide traders with 80,000 USD (4 x 20,000 USD) day trading purchasing power. If a trader buys $80,000 of PQR Corp. at 9:45 am, and then purchases $60,000 of XYZ Corp. at 10.05 a.m. on the same day, then he has exceeded his purchasing power limit. Even if he sells at the same time in the afternoon trading, he will receive a margin call for day trading the next day. However, the trader could have avoided the margin call by selling the PQR company before buying the XYZ company.

Although brokers must operate within the parameters issued by the regulator, they do have the right to make minor changes to the established requirements called “housing requirements.” Brokerage dealers can classify clients as model day traders by placing them under the broader definition of model day traders. In addition, brokerage companies may impose higher margin requirements or limit purchasing power. Therefore, it may be different depending on the broker-dealer you choose to trade with.

Bottom line

Margin day trading is a risky activity and novices should not try it. People with experience in day trading also need to be careful when using margin. The use of margin can enhance the purchasing power of traders; however, it should be used with caution in day trading to prevent traders from ultimately incurring huge losses. Limiting yourself to the limit set for the margin account can reduce margin call notifications, thereby reducing the requirement for additional funds. If you are trying day trading for the first time, please do not try a margin account.


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