Are you familiar with the abbreviation OPM? It can mean a few different things, but in the investing and real estate world it often means other people’s money.
Did you know, if you buy stock on margin you are trading with OPM? Yep. And the brokers charge an interest rate for that. Usually the rates are pretty small, but the margin available is 1:2. Meaning, if you deposit $40,000 into a brokerage account you could buy stock with up to $80,000 of buying power.
Some brokers, like TradeStation and Interactive Brokers, offer 1:4 margin for intraday trading. Meaning if you have $40,000 in your account you have the potential buying power of $120,000 intraday! There’s a phrase out there in trading land that “Margin is a double edged sword”, meaning with double the leverage, is double the risk. My take is, that’s not always the case.
If you go into a trade knowing your risk and you know how to control your risk, you are ahead of the game, big time. A huge rule when trading with margin or when trading in general is, ‘don’t trade money you can’t afford to lose.’ We all know that one!
I personally use a system called R trading for my swing and day trades. This allows me to focus on controlled risk for my trades, regardless of how much money I’m working with.
R stands for risk unit. It is a percentage of your account, usually 1%. This is a predetermined risk value that traders could use for each and every trade.
Calculation: R / The difference between your entry and stop
Example: Let’s say Joe has a $25,000 account. His R therefore is $250, or 1% of his account. This is not his investment amount, but his potential loss on any given trade. He wants to buy shares of SPY at $188 with a stop at $186.
$250.00 (1% of his account - his R) / $188(entry) - $186 (stop) = $2.00
$250.00 / $2.00 = 125 shares he could buy on this trade, costing him $23,500. That’s a big portion of his account and that’s why using OPM can be beneficial, especially as it relates to day trading.
Hop over to my professional trading page and check out how traders have the capability to receive up to $250,000 of allocated funds to day trade stocks with! I explain the pros and cons, but most importantly I focus on how to mitigate risk regardless of your trading style!
Until next time, folks!