Margin trading allows you to use leverage to increase your buying power and enhance your earning potential. In addition to your online trading account, you need a margin trading facility (MTF) account for margin trading.

Even if you have been adept at online share trading, as a beginner in margin trading, you need to follow the strategies and rules to be successful.

• Avoid volatile and static stocks.

You should avoid stocks that are too volatile or static because, either way, you risk losing money. A static stock with little price movements may not generate profits even as your interest cost increases. High volatile stocks can magnify your losses, and the probability of your trade ending in red is high when all costs are added up.

• Calculate break-even point

Before taking a position with margin funding, you should calculate your position’s total cost and the practical break-even point. While calculating cost, you should consider all costs such as administrative charges, depository participants (DP) charges, processing charges, and interest costs. You can then take a clear call on whether the margin funding position will be beneficial.

• Follow stop-loss for intra-day margin trading.

You should put a stop-loss on your intraday margin trading order. You should not get into a position without having a predetermined stop-loss order. Furthermore, you should diligently follow the stop-loss and not try to average the positions if the price moves against you.

• Profit booking

You should reduce the turnaround time for your positions to keep churning your capital to optimise your profits and protect your trade from volatility.

• Gradual purchase

The best strategy to avoid margin trading loss is gradually building your position over time, not in one shot. You should begin by buying 30%-50% of the positions in the first instance, and as your trade becomes profitable by 2%-4%, you should add money to your account and further build on your position.

If the margin trade doesn’t go your way after the first position buildup, then you won’t have to incur huge losses, which you would have if you had built your position in one go.

• Ownership of margin trading position

You should take ownership of your margin trading position and square off intraday positions before the scheduled time specified by the exchange and your broker. For example, the brokerage Dhan auto square-off feature square off all the intraday positions at 3.20 PM.

You should not depend on brokers to close out the position, which they do through their risk management program. You may not get the best price then, which can limit your profitability.

• Terms and conditions

Before starting the trading, you should read and understand the terms and conditions and other regulations governing margin trading. If you find unfavourable terms late into a trade, it can influence your portfolio’s performance, which may lead you to lose money in the market. You should clarify your doubts with the broker before making your first trade.

• Interest rates assessment

Margin is like a loan that carries interest; you should know the interest rate your broker will charge you. It is a good practice to borrow for a short duration and settle your margin at the earliest to limit your interest payments.

You must be highly cautious while entering margin trades, specifically if you are a beginner. You should always consider your cash position to withstand losses momentarily from adverse market conditions and meet the margin call. You can open trading account with a leading broker such as Dhan to begin margin trading.

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• Source: Plato Data Intelligence: Platodata.ai