Because the notional value of a contract is a component in figuring out the the size of the trade (or equivalently the effective leverage). It can be shown mathematically that any profitable system becomes unprofitable if you go beyond certain leverage.
I agree with above. Notional high or low, you determine what is the RISK on the particular trade and size the trade accordingly. If the risk for that trade (size) is bigger than your criteria (let's say 2% of your account) then you're over leveraged. Otherwise you're good or under leveraged. But it's already almost 9:30pm in my time zone I have already had a few drinks this fine saturday evening so I might be talking out of my ass
The margin is to protect broker/FCM from trader's stupidy, nothing more. Your thinking is equivalent of trying to say how many calories per day is RIGHT. It depends on a individual. Therefore there is no "number" for leverage. It is either too much, too little or just right and it depend on a trade you take and your account size. Determine what you want to risk per trade as a function of your account size, determine what is your risk on a particular trade you take now, then leverage up so it matches. Only if your risk on a current trade is more than risk you want to take on each trade then you are "over" leveraged. It's meaningless to post leverage as a "number"
Dude, whatever you are smoking, I want some.... Look, if you don't like numbers or calculation, don't participate in a thread like this. You are clearly ignorant.... You failed to notice I never said anything about what is good or over leveraged. I provided a formula, that simple. Whatever your fertile little mind read into my posts, that is your problem....
The formula posted by OP does not tell you what leverage one should take. All it tells you what your leverage is, once you are in position. And the only three things that affect that number are account size, position size, and contract value. If you want the answer to the question "what is the optimal leverage", then there are other formulas, such as "optimal f", Kelly fraction, Stutzer Index, and utility functions.
You actually got that wrong. I DID notice that you haven't said anything about what is "proper" leverage that is exactly why I participated in this thread to point that out. Calculating some number that's doesn't tell you anything meaningful is POINTLESS. No Nobel Prize for you, at least not from traders, sorry. Feel free to plug your "leverage number" into your trading method and tell me how that affects your trading, then I will be more than willing to listen to your wisdom.
if the number calculated doesn't tell anything meaningful then what is the point of it? To be meaningful there needs to be some kind of reference. I've never heard anybody talking about leverage "number", it is always about high/low leverage, lever up/down and such. What is the optimal leverage? No need for fancy formulas. Simply determine following: 1. what is the risk on the particular trade (bet) you want to take 2. what is the max allowable risk per trade on your account then load as much size as to execute that trade and not violate your max risk per trade. Anthing below is under leveraged. Leverage 1:12, 1:20.... who gives a fuck. If my stop is say 2pt in ES what do I care if my leverage is 1:20, 1:12....? All I care is that my leverage is too much/too little/just right. There is no number on it. But whatever works for you...is fine with me. Cheers!
I read in a book that leverage ratio = Assets/equity. Besides that, one needs to monitor how much assets is made up of debt. If the debt portion grows due to losses, watch out!
Your leverage of futures is the same with other product. If the notional value of your future position is the same as your account size, then you're using 0 leverage. If the notional value of your futures position is 2x of your account size, then your leverage is 2x. Am I missing anything?