My first margin violation (they liquidated my position!)

Ah, don't worry, I'm not crazy. You can subscribe to this channel now. And then get ready. Because the story I'm going to tell you today is one for which I'm sure many people could have reacted like the scream that you heard at the beginning of this video. So what happened? Well, I got my first margin violation after more than three years of trading. I want to share with you the story what happened from the beginning. So possibly you will avoid to have such issue. Now. First thing is that I live in Singapore. So usually the way I trade the market is I place my trades during the day and then the market opens at 10:30pm local time. So I place my trades when I am, you know, during the day when I have some free time, then I go sleep. And then the day after I wake up, I have my breakfast and then I check what happened and I update my trading journal. That's good. So that day, it was last week, I. I was watching this biv is an ETF tracking bonds. And then I saw this nice setup. Basically is a breakout setup. You can see here, the price was touching this resistance level three times. Let me highlight for you. So the price was here, here, three times, four times. And then here at this candle there was a breakout. Great. So I place my order here, okay. To enter. And then basically the day, during the night for me, I enter at this candle. Okay? Great. So imagine the day after what happened when I saw that my position was partially sold. Here is what happened, more in detail. I bought 436 shares. The entry price was 88.15 and the stop loss was 87.61. What? Why? Because I enter above this level and my stop loss was a little below this candle. Okay. And also below around the 20 EMA. So it was a good, a good stop loss, at least according to my strategy. So the day after I found the following situation. I only had 191 shares of beef, okay? I had no stop loss. So my stop loss was removed. It was not there anymore. And the remaining 245 shares were sold at 88 10. So I was looking at my screen and I was like, what the hell? I mean I didn't. I was pretty sure that this was the order I placed because as I said, it's more than three years. I'm trading at this level. I know what I'm doing. So I rule out the possibility of a mistake. Then I was thinking at all the possible scenario like oh my God, someone entered my account. They did some shit, they Stole my password, all these things. But then I say, well, it doesn't make any sense why someone would have entered my account. That by the way is protected with the 2K authentication. So it's not even easy to do that just to sell some of my shares. What's the point, right? And then I say, okay, let's have a chat with the broker that I was using. That in this case is Interactive Brokers. Okay, maybe you know that I use Tinker Swim for my long term portfolio and for charting and screening. But then for trading I use Interactive Brokers. And I guess that many, many of you would have been pretty scared, you know, that's why the scream at the beginning, I have to say, is because some shit happened already during these three years. So I, I am less emotional at this level. But anyway, I chat with the broker and then I was like, okay, look, something happened, I don't know what. Basically I had this position and I bought Biv. This was the idea of my order. And then I found out that shares have been sold and I don't know why. So the broker told me, okay, wait, let me check. Then I wait a few minutes and then he went back to me and then he said, yeah, we had to partially sell your position because there was a regulation T violation, a margin violation. And I was like, no, I don't think it's possible. Because first my strategy is such that I basically cannot have this problem for the position. Sizing I use is very, very difficult, if not impossible, that they can exceed the margin. What does it mean, exceeding the margin? Well, probably, you know, margin is like they give you 10k. Or I can show you here with Interactive Brokers. See, for example, here, let's say in this case, this is my demo account. This is, I have no position now, So I have 31,000 cash, right? But with this amount of cash, I am able to buy up to 124,000 of stocks. Okay, so basically four times you put 10k, you can buy up to 40. That, remember, doesn't mean you can lose 40. You can still lose only your 10. This is one of the big mistakes that people make when using margin. Anyway, I was pretty sure that with my position sizing I still have enough money. So I say, well, I think it's not possible because yes, the position I took was quite big, right? Is 436shares times $88 is more than 30k. But I have enough margin. And actually I check and I still have. Then I say, yeah, yeah, it's fine, that's not the problem. The problem is that you violated the special memorandum account requirement. And I was like, I evaluated what. Okay, so there is something that I didn't know, I was not aware because it never happened to me in these three plus years. And the problem was this guy here, sma. It's something that I saw, but I never pay attention to it. I was, well, maybe it's one of these statistics that they want to give you. But then the broker explained me what it was and then I understood what happened. So what happened you may be wondering? Well, the thing is that this SMA is another number that is computed. I will show you later how. And basically if this number is negative, okay, 25 minutes before the market close. So if this guy is, if he's below zero 25 minutes before market close, then they have to sell a fraction of your shares so that it will be again non negative. That's what they did. And I was not aware of that. Maybe if you already knew that, please leave me a comment because I want to know if people are aware of this special memorandum account. If it's kind of general knowledge, but I tell you, I never heard about that in the courses I have attended and in the books I read. So I'm really curious to know if you were aware of this. And then a broker that was quite kind, I have to say, he told me, well, if you want to find more information, I give you a link explaining that. So I can show you the link right now and then we can better try to understand what is this SMA and how to compute and how to make sure we don't have this problem. Okay, so the link that I will put in the description of the video is this. Basically the best way to understand is to go through the example that they will provide. Okay, so for example, here they say suppose you have 10,000 cash, okay? And this is the situation what you should see basically here, here you see all the terms. You see the equity with loan that is here. And then you have the initial margin. So basically the same number that you should see here and this sma, that's how it is. So what, how do they compute this guy? Well, if you see this is the formula. So they say that the SMA is the greatest between two things. The number one is the prior day SMA that at the beginning is equal to the cash you have plus minus change in days cash, meaning to say if you deposit, if you put money, it will increase, if you withdraw, it will decrease. And then you also have to include the Reg T initial margin. So what is this is basically 50% of your stock value. Okay? So you do this number, you do this computation, then you get the first number. The second number is your equity with loan value. Okay? That you can find here minus this reg T margin, that is 50% of the value of the stock. So in order to know what is the sma, you need to compute these two numbers. You take the maximum and that will be the sma. Never heard about it. I had no idea. Okay, so then they go through the example. They say, let's say that you buy 500 shares of something trading at 40. It means that you buy 20k. Now what happens is that you had 10,000 cash and now you have minus 10,000. Why? Because you used the 10,000 that you had plus you are using 10,000 that the broker gave to you, the margin. Okay? And then here you see the equity with loan value that you see here how they compute it. Basically the cash value plus stock value plus. So it's the value of your, of your account in a way. And then how is this affected? So here they show you how to compute that. Right? So remember, this is the formula. Okay, I can highlight. So they say okay, the previous day SMA was 10,000. Fine, change in cash zero. Because you didn't withdraw, you didn't deposit. And because now you have 20k of shares. 20k worth of shares, 50% of it is 10k. That is this regulation T initial margin. Fine. So you get zero. The second number is equity with loan value. That was 10,000, right? Minus the reg T margin, that is again 10. So you get zero and zero. The maximum between these is zero. So your SMA is zero. Since it's non negative, no problem. Okay. Now they say, okay, some scenario like the price of these goes up, fine, the price goes down, fine. Actually if the price goes up or down, I realize that this will not affect your sma. So if you have some shares in your portfolio and the SMA is not negative just because the price of the share will move, it should not affect the sma. It is only when you take a new position like what I did with Biv, that this value can change. Okay? And actually that's what happens here. First you see there is a sell. So when you sell your share, so you basically how to say you reduce the amount of your portfolio, then your SMA increases. But when you buy more, that's when you may have troubles. Okay? So in the example here, they tried to buy 500 share at 101. So this was too much for the margin they had, so it was rejected. But this is the interesting part, and that's basically what happened to me. They buy 300 shares at 100, so 30,000. So for the margin that they have, it was fine. You see here, when they buy too much, they have excess liquidity negative. They have available funds negative. So basically when this number is negative, they don't allow you. It's basically trade that is too big. But here it was still okay, still positive. Right? Now the problem is that if you compute the SMA this way, then you find out that the number you get is negative. And because the number you have is negative, guess what happened 25 minutes before market open. Sorry? Before market closes. If that number is negative, they have to sell some shares to go back to a positive number. And that's what happened to me. So what is the lesson here? First, we need to know that this SMA is important, especially when you have a big position. That's what happened in this case, because I was having trade for which the total value was around 30 plus K. So my suggestion is, let's say you have your portfolio and then you want to place a trade. First you check this number. Okay, you check s. See here, maybe I can, I can highlight again. Okay, so first thing you have to check before placing a trade, you check this number. And the question is, is it almost zero or close to zero? Okay, if it's not very big, then you use the formula that I show you in the link to understand what will be the new value after you place a trade. Especially if the trade is very big. Because if the trade maybe you have 30, 40k in your account and you don't have many positions, and then you place a trade with a total value of $5,000. Fine. But like in this case, when you start to have trades for which the value is on the 30, 40k, then better to check. And in case it's negative, either you don't place the trade at all or you have to reduce your position. Okay? Now in this case, they sold my shares. Actually, I found out that they could have sold anything, you know, not just the last one, but I had other things in my portfolio. I was in a way lucky that they sold what I just bought. And I didn't have a big loss because basically they sold that, As I said, 245 shares. I bought at 88, 15, they sold at 88, 10. So basically I lost $19. Not too much. It could have been worse. It could have been worse. But then there Is another risk that I want you to consider and is the risk of missing opportunity. And to explain that, I want to show you this guy. So a few days before entering there, I entered this trade. This is a counter trend trade, so completely different strategy. And the idea is that when you see the price that is here around the support and then I saw this candle, I basically enter here, okay? I enter above this candle. Now what happened after that? The price went down and then here my stop loss was hit. Sometimes this happen, you see a low somewhere, okay. And then you realize that the price goes up a little bit. Then there is stop losses trigger and then, okay. And then after that the price will start to go up again. So I wanted to enter again because usually when this happen is because people, some people that see where many stop losses are, they want to trigger the stop loss and then they enter when the price start to rise again. So I wanted to enter but because I was in the middle of this problem to clarify what is SMA and what is happening, why they sold my shares. It was exactly that day. So I didn't enter my trade that it was here. So what happens is that I missed the opportunity. Now the price is going up. And this was if you want missed opportunity because I didn't know about sma. So I was in that situation. I didn't want to place any other trade because I say, well, maybe I place another trade and then this guy will sell again my shares. I need to understand first how these things work and then I can place more trades. So I hope with that this video helps help you to understand something new. It definitely helped me to understand this special memorandum account. I didn't know before what it was because I never had a problem with that. Again, if you knew that or if you never heard about that, whatever you think about that, let me know in the comments because I think it's also good to exchange ideas and maybe other experiences if something like that happened to you as well. And with that, as usual, thank you for watching. If you find this video was useful, put a like subscribe to this channel will really help. And as usual, see you next time.