Scalping is one of the most alluring styles of trading, because it is believed that scalpers can make an entire day's profit within a few minutes. This is theoretically true, and a professional scalper can make significant profits while all of the longer term traders are still waiting for their first trade of the day. However, as with many aspects of trading, this is a case of something being easier said than done.
If you do not yet know what scalping is, or if you are considering being a scalper, my introduction to scalping explains what scalping is, and which traders scalping is most suitable for. The introduction to scalping will help you determine if scalping is the best trading style for you, or something to stay away from.
Thanks for the great info Adam! May I ask something? Let’s say, I have $5,000 at IB and want to “spend” $4,000 for scalping. Since I do not borrow any money from my broker, (I’m on a margin acccount) am I risking any part of my capital? (e.g. margin call or anything else that I’m not aware of?)
I am not sure that I understand your question correctly, so I am going to answer it twice.
Answer # 1:
If you are asking if any of the $4,000 is at risk, then the answer is yes.
Every trade incurs some risk to your trading capital, because the trade could make a loss instead of a profit. Whether you are borrowing money from your brokerage (i.e. trading using margin) or not, does not make any difference.
Answer # 2:
If you are asking if any additional capital (i.e. the remaining $1,000 or other capital), then the answer is both yes and no, depending upon the trade in question.
For example, if the $4,000 is being used as margin (e.g. if you were trading a futures market), then the entire $5,000 would be at risk, but not any more than $5,000, because IB would automatically exit the trade when the margin was no longer covered by your account.
However, if the $4,000 is being used as cash (e.g. if you were trading an individual stock without margin, or were trading an options or warrants market and only making long options trades), then only the $4,000 would be at risk, and the remaining $1,000 (and any other capital) would be safe.
I hope that I have answered your question, but if not, let me know, and I will discuss this with you further.
Thank you for your comment.
Thank YOU Dave!
You see, what I haven’t actually figured out yet is this: Can I use a margin account as a cash account, simply for buying and selling stocks? (no options, futures etc. – just some old school stock trading, aka scalping my way)
I just want to avoid a margin call when scalping. I don’t mind if the price of the shares go down (I can wait till they go up again, no matter how long that might take), as long as I can make sure that the stocks will remain into my account, until I decide when to sell them and not let my broker decide when (because of a margin call).
I have searched on many forums and asked many traders about this and I get different answers all the time. For instance, on IB, when you buy stocks with cash you have in your account (I am on a margin account), you still need to take care of things like margin maintenace-why is that? Since you are trading with your own cash and you haven’t borrow any from your broker.
Sorry for all these newbie type questions Dave. Keep up the good work!
I think I’ve accidentally wrote “Dave” instead of “Adam”-sorry about that!
As you have a margin account with IB, any trades that you make will be made using margin (i.e. leverage). This means that your account could be subject to a margin call (or in the case of IB, an automatically exited trade). However, as long as you keep the full cash value in your account (and not just the margin value), the margin call will never happen (and IB will not automatically exit your trades).
For example, if you want to use $4,000 of cash to enter a long stock trade at $10, you would buy 400 shares. However, when you buy the 400 shares, only $1,000 (approximately) of cash would be required (because of the use of margin).
If you only kept the $1,000 in your account, you would receive a margin call (or your trade would be automatically exited) if the stock price decreased to $7.50 (because the trade would have lost $1,000). However, as long as you keep the full $4,000 in your account (and do not use it for any other trades), the margin call will never happen, because your account will always cover the required margin for the trade (even theoretically down to a stock price of $0).
In other words, as long as you keep the full cash value of your trades in your account (and do not use the cash for any additional shares or any other trades), then your account will never receive any margin calls (or automatically exited trades), and you will be able to trade your margin account as if it were a cash account.
I hope that this answers your question.
Thank you for your comments.