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Should I Trade on Margin Account? What is Margin Trading? - YouTube
Channel: Humbled Trader
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so we're gonna be diving into what
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exactly is margin
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in day trading the pros and cons of
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using a margin account
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and of course how to properly use it to
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grow your trading account
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before we start please remember to drop
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a like
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to sign up for a free subscription of
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bad
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jokes seriously though be careful what
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you wish for
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so here's the difference between what it
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means to day trade
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with a margin account versus cash
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account let's say we have a five
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thousand dollars
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small cash account which is what most
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conventional investment accounts are
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to day trade let's say i want to buy
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tesla stock
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right now at 340 dollars normally if i'm
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buying with a cash account of five
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thousand dollars
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i could only buy 14 shares of tesla
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stock
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and if i sell my shares at 360 dollars
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and make 20 dollars a share i'm 14
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shares that's 280 dollars
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worth of profit from a cash 5 000
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account that's not bad right now what if
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i'm trading the same
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5 000 capital with a margin account
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trading on a margin account allows you
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to borrow funds from your broker
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hence increasing your buying power in
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order to purchase more shares
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than if you were just using your own
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five thousand dollars in capital
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so instead of just my cash buying power
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i could use up to twenty thousand
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dollars of buying power
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if i use margin so in this example if i
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intend to buy tesla stock
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here at 340 dollars and sell it for a
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quick bounce
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i could buy double the amount of shares
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of tesla
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than if i were using a cash account
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since my broker
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allows me four to one leverage so if i
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do the same thing and sell my tesla
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stock
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for a bounce of 20 points then i made
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20 dollars a share on 30 shares that's
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600
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in return only using my own 5 000
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of capital again this is just an example
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you definitely don't want to use all of
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your twenty thousand dollars of buying
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power
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and this is the biggest pro of trading
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on a margin account
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by using this leverage properly margin
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accounts
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allow you to amplify your potential
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returns
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but at the same time your potential risk
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is definitely going to be higher as well
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which is very important and we're going
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to be going over that
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in just a little bit when you're using
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margin you're borrowing money from your
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broker to finance
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part of your trade most brokers will
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give you three to one
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four to one or sometimes even six to one
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worth of buying power so with the same
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five thousand dollars capital
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i could get up to fifteen thousand
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twenty thousand
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or even thirty thousand dollars worth of
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buying power
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now that's the leverage when you're
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trading a margin intraday
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but when you're holding positions
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overnight your buying power
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drops to two to one so the maximum
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amount in this example
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will be ten thousand dollars worth of
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buying power
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overnight the leveraged buying power
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is definitely the first pro of trading a
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margin
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now the second pro of trading on a
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margin account
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is the trade settlement period if you're
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using a cash account to day trade
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the amount of capital you put into your
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trade positions
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will take two days before it comes back
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into your trading account so in our
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example earlier on the tesla trade
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if i bought 14 shares of tesla and made
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280 dollars of profit i would have to
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wait
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two trading days for that cash five
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thousand and forty dollars
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to return to my account in order to use
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it
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to trade again four thousand seven
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hundred sixty dollars
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was my original capital i used to buy 14
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shares of tesla
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and 280 dollars was my profit
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from the trade so in other words after
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that tesla trade is closed out
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i would only have 240 dollars
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left in my cash account for the next two
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days
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i essentially can't trade anymore until
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that cash
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settles it's very important that you
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actually wait
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two days trust me you don't want to
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experience any
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cash settlement violations and risk
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your broker locking your account for 90
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days
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this is the same as violating the pdt
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rule
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but on the other hand with a margin
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account
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you do not have to wait for the cash to
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settle in for two days
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before reusing the capital again and
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this my friend
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is extremely beneficial especially if
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you want to
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trade full time as a day trader there's
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always different opportunities in a
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stock market
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every single day i don't want to have to
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wait two days to day trade again so in
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our example earlier
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once i closed out of my tesla loan
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position
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while the profits of 600 will not come
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in until the next
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trading day i could reuse my original
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five thousand dollars of capital
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and then the same twenty thousand
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dollars of buying power
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in the same day now the third pro
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of using a margin account i know you're
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going like
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hold up there humble trader there's more
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this is this is way too much
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yeah i kept the best for last and this
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is
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none other than the ability to short
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sell
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with a margin account even if you don't
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need that extra leverage in buying power
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or you don't care about the cash
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settlement period because you're already
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a baller
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having the ability to short sell just
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opens
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so much more opportunities to profit in
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a stock market
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whether the market is going to the moon
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or crashing to the ground
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a margin account allows you to short
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sell
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and profit from the falling stock prices
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when you're shorting you're essentially
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borrowing shares of a stock
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from your broker to sell and then you
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buy them back later on
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hopefully at a much lower price and you
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profit from a difference
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and you cannot short sell with a cash
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account
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and that my friends is what it means to
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day trade
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with a margin account i see you're
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getting interested
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but you know me i'm not going to give
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you all the rainbows and sunshines and
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lambos
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without explaining to you the potential
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downside
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of trading with margin accounts and why
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am i saying this
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trading a margin comes with higher risks
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than using cash accounts since you're
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not only trading with your own money
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you're also trading with your broker's
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capital if you start
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gambling with your entire buying power
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chasing the height of the day breakout
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and following chat room alert not only
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do you risk your original five thousand
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dollars of capital
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you could also owe your broker a lot of
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money
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okay this is serious talk here and i'm
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kind of like sweating because
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she just got really hot whether you are
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a new trader or not
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the risk of trading a margin is
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extremely
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important to understand if you're using
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a margin account
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you must be aware of the margin
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maintenance
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margin maintenance is the amount of
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capital
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you need in order to keep all your
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trading positions open
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for example if a trader borrowed from
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the broker's money to buy
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30 shares of tesla at 340 dollars like
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our example earlier
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he or she would need to borrow an
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additional
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thousand two hundred dollars on top of
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their original five thousand dollars of
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capital
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so the total value of this position is
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now ten thousand
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two hundred dollars and the margin
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maintenance in this case
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will be around fifty percent because
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around
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half of the capital used here belongs to
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the trader
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and if this broker has a margin
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maintenance of 30 percent
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this stock position is perfectly fine
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right now this trader is good we're good
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now god forbid on that same day elon
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musk is bored out of his mind
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in the office or he decides to smoke a
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little bit
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something something and he decides to
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tweet
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on his phone tesla stock is too high
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right now
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imo and after he sends out that tweet
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tesla stock drops to 240 dollars
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that means the value of this traders
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long position in tesla stock
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is now only worth 7 200
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but remember this trader borrowed 5
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200 earlier from the broker since he
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used margin to purchase
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this tesla stock position this is where
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the trader
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will be trading in very dangerous waters
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get it because if you take the valuation
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of the tesla loan position
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which is now down to 7 200
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minus the original amount he loaned from
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the broker
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the 5 200 the amount
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that actually belongs to the trader is
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now
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only two thousand dollars now that
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little amount remaining is now only
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worth
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twenty seven point seven seven percent
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of margin maintenance and remember what
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we talked about earlier
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the margin maintenance is thirty percent
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for this
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account and since the current valuation
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in the tesla stock
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is down from ten thousand two hundred
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dollars to seven
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thousand two hundred dollars the trader
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must keep
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at least twenty one hundred sixty
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dollars
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in the trading account in order to keep
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it above
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thirty percent otherwise he run the risk
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of his broker
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liquidating his entire account and close
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out his tesla position for him
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the moment your margin maintenance drops
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very close to
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or below the minimum this is when you'll
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get
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a very important phone call no it's not
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a guy with a girl
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calling you to tell you how much they
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miss you i mean i wouldn't know what
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that's like
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no this is even worse the mic bag holder
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contacting me again
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this is what we call a margin call a
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margin call is not an
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actual phone call nowadays maybe it used
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to be but
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even the brokers nowadays are too lazy
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to pick up the phone and dial
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no it's an email or a text alert sent
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from your broker straight to your cell
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phone
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demanding that you fund additional
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capital
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so your position keeps above the 30
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percent
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maintenance to respond to the margin
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call in this case
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the trader in our example could number
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one
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either fund at these additional 160
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dollars
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to account to stay above 30 margin
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maintenance
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option number two sell parts of the
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stock position
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for a loss but this equity that's
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released
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would reduce the amount of money that he
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is borrowing from the broker
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if the trader does not respond to option
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1 or 2
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quickly then the broker may liquidate
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the entire position for him without
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further notifications
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margin calls and liquidation ensures
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that the broker
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will get the original five thousand and
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two hundred dollars of loan
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back i mean they gotta protect it right
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so they want to make sure their own
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money is safe
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and maybe some of the traders too maybe
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just
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just maybe so if the traders tesla loan
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position
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in our example gets liquidated at 240
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dollars
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that means the trader would take a loss
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of a hundred dollars a share
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thanks to elon musk's tweets on 30
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shares
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that's a realized three thousand dollars
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loss
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basically this is a sixty percent
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haircut
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on the original five thousand dollars of
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margin account
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just like i mentioned earlier while
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using margin
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gives you four to one or greater
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leverage buying power
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it also increases your risk and that's
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why i have some trading tips for you
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if you decide to use a margin account
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number one
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do not over leverage be smart just
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because you have that much buying power
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doesn't mean you need to use it for
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example if i have fifty thousand dollars
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in my trading account
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right now that means i have up to two
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hundred thousand dollars
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worth of buying power just because i
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have the buying power
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doesn't mean i'm going to use it and
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especially if you're new to trading
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and your capital in a margin account is
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only 5 000
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then you should only trade with that 5
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000
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so for that example you should only buy
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up to
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14 shares of tesla you could definitely
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keep the margin account so you get the
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ability to short sell
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and have the funds settled in your
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account within the same day
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but please be smart just because you
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could
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use a buying power doesn't mean you
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should number two and it's very
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important
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follow your stops the trader in our
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example earlier
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his name was mike bagholder he didn't
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follow his stop a proper
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trading plan should include an entry
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profit target
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and most importantly a stop so you can
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prevent
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one losing position from blowing up your
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entire account like we talked about
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now back to the original question from
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the beginning
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should you day trade with a margin
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account
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well i'll tell you this right now margin
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accounts are extremely beneficial for
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professional full-time day traders
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who use them to maximize profits both on
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the loan side
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and the short side when used correctly
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and accordingly
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you can leverage your buying power and
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take advantage
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of the market volatility but when used
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incorrectly or if the trader disregard
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risk management he or she could lose
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the entire trading account due to a
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margin call
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again your trading account type whether
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it's cash or
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margin it's just a tool of doing
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business in day trading
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by itself it's not going to determine
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your success
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nor failure there's a lot of
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misconceptions
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online about margin it carries a bad
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rep because a lot of people say it's
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gambling
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or it'll be the reason you blow up all
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my accounts i use to day trade
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are margin accounts and it's the same
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way for
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most full-time day traders i know let me
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reassure you
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margin by itself it's not the reason
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traders fail
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or blow up it's the trader's own lack of
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risk management
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with a lack of discipline and for many
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people it's a fact
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that they rely on chat room alerts
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that's doing the damage
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and truth be told a reckless trader can
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blow up
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either margin or cash accounts so this
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is definitely
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not limited to margin my friends let me
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know whether you're day trading with a
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cash or margin
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account in the comment section below
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thank you guys so much for watching as
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always
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and the humble trader and i'll see you
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guys next week
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hey guys thanks for watching i hope you
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enjoyed the video
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and the bad jokes if you want to see
[960]
more
[960]
day trading content make sure to
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subscribe and follow me on twitter
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and instagram for more if you'd like to
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trade with me daily
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and get my free weekend watch list and
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trading journal
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make sure to check out the links below
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for more resources
[976]
stay green stay positive and i'll see
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you guys next time
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