I believe I understand the intent of this rule. I'll bet that most people (perhaps 90% or more) who trade or want to trade have less than $25k in cash available to trade. So the rule is targetted at those who can least afford to lose their money. We know that trading on margin incurs greater risk than trading on a cash only basis. Given today's volatility in the markets, it's easy for a stock to lose 50% of its value. If you were invested with cash you'd lose 50%, but if you were 100% margined then you'd lose it all.
Of course, the rule will not prevent people from taking even greater risks and doing foolish things like taking out loans to use for trading. The rule does not prevent extreme stupidity. But it does lower the risk to the small trader. A $25k limit is probably high enough to be out of reach of most people. Again, the type of people we are talking about are those who might buy lottery tickets and have a propensity to gamble. I think they want to keep the small gamblers out of day trading, and I think that's a good idea.
Let me tell you about my personal experience. I had been doing some day trading for a few years, but I didn't start taking it more seriously until 1999. That's when I opened a day trading account with $20k. I wasn't trading too well during the first couple of months and I thought that it was due to insufficient capitalization. So I threw a lot more money at the problem. This had a short term positive effect on my trading, but a month later it was all down hill. In seven months I had lost 96% of my capital.
But I was determined to be a good trader. So I closed that account and in October I opened a new account at a day trading firm with $35k. I have only added $18k to that account since then (due to margin calls), but by the end of the year I had recovered all my losses. The reason being that I became a much better trader. Now I'm trading with a lot more capital and I'm comfortable with it.
The moral of the story is that money doesn't make you a better trader, but a good trader can trade better with more money. Note that I am not the type of trader that the rule is targetting. I lost over $100k, but I had a job that paid more than that. So it wasn't like I lost my life savings. People like me can afford to take such a loss and move on. But the rule is targetting those who can't afford such losses. Traders should learn to trade well while trading small. As in my case, more money only exacerbates the problem. In the past I've been able to trade with $5k and more than double that in a short period of time, so I don't think this rule will prevent small traders from doing well.
...tai |
