Comments on Welcome to the Gutter: The Importance of Trading Capital

Jamal, It depends on your broker. If you go with...

2011-04-12T21:29:29.496-07:00

Jamal,

It depends on your broker. If you go with IB they automatically do all the overnight BP calculations for you in real time so you don't have to worry about it. Just remember with IB (or any other broker) you can't hold more than 2x leverage overnight (versus 4x leverage for day trading). IB will automatically liquidate positions about 15 minutes before the market close if you are going to exceed your overnight buying power.

With Speedtrader, you can't day trade with the cash that comes from liquidation of an overnight position. This will be reflected by your intraday buying power. So let's say you hold 20k overnight and have your next day day-trade buying power is 40K. Even if you liquidate the 20k overnight positions, you are still stuck with only 40K of buying power (i.e., it won't increase to 60K). You won't have your full day trading buying power until the next day.

I like IB the best in terms of all the buying power stuff; it's much more user-friendly and you know exactly where you stand in terms of margin, buying power, etc at all times. With Speedtrader, the software doesn't always correctly calculate things...one time I exceeded my overnight buying power and got a Reg T call even though the software said I was OK.

Hi James, I'm about to make the switch from p...

2011-04-12T06:54:34.918-07:00

Hi James,

I'm about to make the switch from prop to broker (specifically Interactive Brokers) and I remembered this post because it highlights the margin call stuff, something I have never had to deal with when I traded prop. I Just wanted to try to understand it better. For example, (I don't plan on using any leverage/margin by the way) if my account was 20k and I held 20k in stock from yesterday and exited that today at break-even, I would now have 20k in cash. But are you saying I couldn't use that 20k to make new trades without incurring a margin call?

Many thanks.

Thanks. Glad to hear that you are following a sen...

2010-04-24T12:08:47.463-07:00

Thanks. Glad to hear that you are following a sensible path.

It is no surprise to me that folks that try trading fail. My estimate is around 90% give up within the first year. The main reason imho is that their expectations are way to high (going to do this for a living) and that they do not have a system. We can't control the markets but we can control ourselves.

There are a lot of systems (methods) that work. I always recommend to everyone who is starting out to read Stockbee's free blog from his very 1st post on. So few do. Yet it probably has more nuggets of wisdom buried in those posts than all of the books I have read over the years. (and yes I have read every post of his, as well as saved them to a hard drive - that I since have lost when my laptop crashed)

To your point, those that survive past the early (newbie) years do go on to succeed.

So maybe one way to look at it is - maybe it is a good thing that they accounts are small (less damage can be done)?

May I also add that during the learning stages, th...

2010-04-24T11:40:59.532-07:00

May I also add that during the learning stages, the importance of paper-trading to develop a trading method/edge which works is invaluable. You get to practice your method without worry. Then, add money after you have an edge which works for you. Mark Douglas, author of "Trading in the Zone" highly recommends this approach. I recommend this interview Mark did with Wizetrade TV... http://www.123learntotrade.com/showthread.php/1829-An-Interview-with-Mark-Douglas-on-Wizetrade-TV

MM, Great comment. I know that's what I'...

2010-04-24T11:00:45.846-07:00

MM,

Great comment. I know that's what I've been doing...adding a bit of money here or there to my accounts wherever I can.

And avoiding the hailmary plays is really important too. I like to follow Van Tharp's method of position sizing. Whenever I've broken that rule for position sizing and went in too big, it cost me.

Staying alive and in the game over the long run is so important. Survival is what separates the successful trader from the unsuccessful one. When I look back on Tim Sykes's posts back in 2008, it's amazing to find how many of those traders that commented on his blogs are now gone.

I will say that what is most important is having a...

2010-04-24T10:44:59.515-07:00

I will say that what is most important is having a system or methodology that can deliver consistent returns over a large # of trades. You will have losers as well as losing streaks. But to build any account you need that positive expectancy that the methodology provides. Tim's methods work (as well as a few variations thereof). Taking a sub PDT account and growing it above that level can take years.

Refrain from any "Hail Mary" type of plays to grow the account. Instead add outside funds as often as you can.

That's the only way I know how to grow the account properly.

Remember - education is more important than capital in the early trading years. Learning about the markets and yourself will pay huge dividends once you have the capital to exploit.

Trade well,
MM

MarketMonk, Yes, TOS was very lax back then. You...

2010-04-24T07:17:51.117-07:00

MarketMonk,

Yes, TOS was very lax back then. You can see a discussion here about it back in 2008 on Tim's site:

http://www.timothysykes.com/2008/06/livestock-returns-tomorrow-1-2pm-est-with-some-changes/

DMoney,

Yes, I started with a small account, but my overall account sizes combined are still very small compared to people like Reaper, and I'm still under the PDT (except Cy Group which lets met trade their capital).

To build a small account, I'd say Tim Sykes's strategies are the best. You just have to be very selective and only wait for perfect opportunities.

Taking profits is an art form and takes experience, and I'm still learning the best times to take it versus waiting. Usually I'll take some profits when the stock looks like it's starting to stall, or maybe if it's reached a key resistance or support point.

Michael,

Thanks for the additional points on how capital helps you.

Great post James. I did not know that TOS was so l...

2010-04-23T22:39:52.312-07:00

Great post James. I did not know that TOS was so lax during that time period.

Dmoney, good luck with your quest to build up your trading account. Wish I could offer up a solution to knowing when enough is enough, don't think I will ever know the answer to that question myself.

That is great info, but in my case, money does not...

2010-04-23T19:14:50.444-07:00

That is great info, but in my case, money does not grow on trees, nor was I born with a 6 figure bank account. You must have started with a relative small account, and grown it...yes? Some of us have no choice but to play with a small account. How about a game plan to help me build to that 100-200k account. My biggest problem lately is knowing how to take a profit, regardless of its amount. I told myself that if the profit was between $100-500 that I would sell. However, some trades go beyond that, and I just want it to keep going. How about some advice for that. Thanks man

One of the most important things about having a lo...

2010-04-23T16:19:41.188-07:00

One of the most important things about having a lot of capital is that even if I take a large loss I still have adequate trading capital.

Plus it gives me the ability to hold longer-term positions or do trades that suck up a lot of buying power (like shorting a 14 cent stock, FRHV, last week, a trade that made me over $2500 in about an hour with little risk).