Good Question on My QQQQ Short Trade

by Ryan Mallory

I received an excellent question from one of our loyal members in regards to the short-trade I made in QQQQ today and it is as follows:

So here is the breakdown. The one part of this question that has to be answered right off the bat, whether or not I am using margin on my trades, and the answer is - Absolutely! While I don't recommend going into margin on swing-trades, for day-trading it is a huge benefit and carries no where near as much risk - assuming it is used correctly. Because I have already pre-determined how much I am willing to lose on a trade, I want to buy as many shares as possible that will allow me to lose no more, and no less than the amount that I determine as being "R".

For today's trade, my "R" represented 0.5% of my total portfolio value, or $250. If I have to go into margin to buy enough shares to equal a $250/0.5% Risk scenario on my trade, then so be it. In fact, I want to have as large of a position as possible on the trade. That is why I go after the tight stop-losses, because I want to turnover my capital as quickly as possible, just like a business wants to turnover its inventory.

So on today's short-trade on QQQQ I purchased 2075 shares which $76,131.75 on one trade or 152% of my portfolio value. Which isn't any major concern for me because I have a stop order in on my position that if it hits 36.81 then I have lost $250 or 0.5% of my portfolio and I am out of the trade all together.

Second question is how did I come away with $212 on the trade, here is the breakdown: $0.11/share * 2075 = $228.25 - $16 in commission fees ($8 dollars for each side of the trade) gives me $212.25, which is rounded down for $212. The SEC fees won't be calculated until tomorrow, at which time I will factor into the portfolio value.

Margin is very important in day-trading - because you are NEVER holding the trade overnight, your only risk is the dollar amount between the entry price and the stop-loss (always, always use a stop-loss in day-trading) multiplied by the number of shares bought. Remember my concern is with "R" the amount I'm risking, not how much into margin I am going.

With margin you get 2x your portfolio value for any one trade, and you can trade up to 4x of your portfolio value in any one day (that's your total buying power).

Hopefully this explains things for everyone. We will use margin in our day-trades (not so much in our overnight positions or swing-trades). This is what allows us to bring in such descent gains on price moves that aren't considered all that significant. Give me a shout if this doesn't clear things up for you and I'll try to explain it even more. For more on understanding "R" and the Risk Reward Ratio, check out this article.