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Investment Capital - Balancing Risk vs. Opportunity

Day trading requires preservation of investment capital. Day trading typically means buying stocks on margin and selling the same day. SEC rules require that a “pattern day trader” maintain a $25,000 margin account to continue trading. If the margin account falls below $25,000 the trader needs to replenish it by adding from another source or by selling out of their position, often with disastrous consequences. The loss of investment capital means the loss of the ability to day trade. One of the basic skills of stock market trading is the preservation of capital.

Financial capital is what the trader has to work with. It is the same as the sewing machine for the seamstress, the table saw for the cabinetmaker or the violin for the concert musician. The basics of stock market investing and trading include managing investment risk in such a way as to maintain the means with which to invest.

The term pattern day trader is defined as a margin customer who will buy and then sell or will sell short and then buy the same security on the same day, four or more times in five business days. The definition also states that the number of such trades is more than six percent of the individual’s total trading activity for the same five days. This is a definition that requires a $25,000 margin in order to continue trading. Although the trader having a margin protects the market in which the trader trades, keeping a margin is essential for the trader. The margin, and hopefully more, is the trader’s investment capital. It allows him or her to take on promising trades by leveraging his or her assets, and make substantial profits.

The risk of the day trader leveraging investments is, of course, that the trader can lose instead of win and lose most or all of his or her assets. Thus the wise day trader always plans to risk only a portion of his or her investment capital. A practical matter is that very conservative investments, such a dividend paying stocks will provide a predictable rate of return on investment. Capital raised by borrowing on other assets, such as a house or a business, carries a cost, similar to the carrying cost of inventory and business assets. The trader needs to make at least as much money as the cost of the borrowed capital in order to break even. The trader needs to make at least as much more as a conservative investment for day trading to make any sense.

Successful day trading involves balancing the investment risk of trading with the opportunity that margin trading presents. Trading too close to margin can result in the trader having to exit a promising position before successful execution or, worse, having to exit a losing position, thus wiping out all of his or her margin investment capital. All of this gets back to knowing how to trade, developing skills, exercising discipline, and always trading according to a well thought out trading strategy. Using time tested tools such as Candlestick chart analysis and Candlestick trading tactics will allow the day trader to let the market tell him or her what the market will do. Using time honored techniques can help the day trader make good trades and avoid falling below margin.

Market Direction: After a hard market decline, there is a period of time required for investor sentiment to recover. Although the DOW and the NASDAQ revealed strength today, both indexes are still trading below the tee line. The stochastics show both indexes in the oversold condition. The Dow has shown indecisive trading over the past week but it has not yet produced a confirmed buy signal that would show the Bulls have taken back control. Purchases in this area require nimbleness. The market is showing bottoming action, but the trend is still considered downward until bullish confirmation. However, this still creates a profitable atmosphere for the candlestick investor. The charge that has shown good strong buy signals continue in their uptrend.


Having the ability to recognize the strong pattern potentials allows an investor to take advantage of profitable moves in spite of the general market direction. As can be seen in our recent recommendation of PVTB, the markets hard sell-off did not affect the breakout of a Fry Pan Bottom pattern. The prudent positioning of a portfolio would be on the short side during a market selloff. The benefit of being able to identify high profit pattern situations is positioning a portfolio so that it is not totally oriented in one direction. The past couple of weeks may have had a good percentage of the portfolio positioned in short funds and/or short positions. But having a small percentage of the portfolio in a long position or two allows an investor to comfortably have 100% of their funds committed to the market without being exposed totally in one direction.


How much investment capital should you have exposed to the market at any one time? Utilizing candlestick analysis, the answer is 100%. The majority of the time, candlestick signals or patterns provide a high degree of accuracy for analyzing the direction of the trend. It is either in an uptrend, a downtrend, or a sideways trend. There will be a very small percentage of the time when the markets do not provide a clear message. These market conditions usually involve whipsaw action. When those conditions are identified, the prudent investment strategy is to sit in cash. A good example was the summer of 2008 when a Dumpling Top pattern was forming in the Dow. The characteristics of a Dumpling Top pattern make it very difficult to make money until the consummation of the pattern.

The majority of the time, a trend can be identified. The advantage provided by candlestick signals is the capability of finding more tradable situations than most investors can accommodate . This makes profitability much easier when there are more positions that are showing good buy or sell signals than what an individual's portfolio can handle. It allows for the cultivation of positions. Once a position has produced a good profit, it may now be in a situation where the risk factor is high to continue to hold that position. Having a supply of new high profit situations allows for the taking of profits in a high risk position, even though it may not yet be to the top of its trend, and move those funds back to a much lower risk/high potential trade.

Most investors feel that they have to buy at the very bottom and sell at the very top. This is a ego thing! The profitable investor buys when the probabilities are in their favor and sells when the probabilities get less favorable. They take the fat part of the trend profits and then move on to the next trade that can produce high probability profits. One of the hardest aspects for most investors to learn is that they are trying to maximize their profits for their account, not maximizing their profits on each trade. The elements built into candlestick signals allows investors to establish a money management program that dramatically reduces their emotional involvement while greatly improving profitability. Buy low, sell high. That is the mantra each investor strives for. However, most investors try to take that to the limit. Their ego wants to be able to brag that they bought a position at the ultimate low and sold it at the ultimate high.

A major part of profitable investing is learning how to buy and sell when the probabilities are in your favor. The Candlestick Forum Two-day training program teaches investors how to invest correctly using the information incorporated into candlestick analysis. Do you have trouble pulling the trigger to get into a trade? This candlestick training alleviates that fear. It provides a clear set of parameters for when to be buying and when to be taking profits. Learning how to establish the correct stop loss practices that effectively eliminates the fear of having your money exposed to market risk. Do you have a hard time taking profits? Are you afraid to sell and then see the price zoom higher? The simple visual elements of candlesticks produces the appropriate evaluation of when to get out of a trade and went to get back into a trade. Do not miss this opportunity to fine-tune your investment perspectives that will improve your investing for the rest of your life. The Candlestick Two-day training program is scheduled for February 20 and 21st. Stay in your pajamas. Brew your favorite coffee. These training sessions have a limited number of seats to provide participants the opportunity to ask as many questions as they need. You will gain valuable information that not many investors take the opportunity to learn. Sign up today. Click here for more information

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Good investing,

The Candlestick Forum Team

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