leveraged trading

Discussion in 'Strategy Development' started by elit, Nov 10, 2006.

  1. elit

    elit

    Good,day, I'm wondering a bit about leveraged trading. I think it sounds like a sweet deal, if you have a profitable strategy and good money management rules that you stick to.

    Say I have 10 000 risk capital that i want to leverage 5:1, which gives me 50 000.

    My money management rules says risk only 2% in every trade, which on the leveraged capital is $1000. Does this mean that 10% of my unleveraged capital is at risk per every trade?

    My money management rules also say that I need to place a stop loss that is 10% away from the entry price on every trade.
    On a trade where I risk 2% or $1000, according to my money management rules, I will get stopped out if the trade
    goes against me 10%, and thereby would lose $100 per trade that goes against me.

    Does all of this mean that for me to wipe out my whole account of $10 000 unleveraged it would take 10 losses in a row where the whole posisiton is lost. Or 100 losses in a row where I get stopped out.


    I'm not sure If my calculations are correct. 10 losses in a row has not occured during backtesting my strategy. 10 losing trades in a row, where I would not get stopped out and thus lose the entire position is not that likely I think. I don't know, I must be missing something. :confused:
     
  2. 1% risk on underlying capital is $100 if you have $10k.

    Dont use leverage to increase your risk, use it to diversify. I wouldnt go and start trading contracts you cant afford with the 10k with the 50k leverage.

    Use something like this:

    Position Size = (1% of Equity) * Buyprice/(ATR(10))

    If you swing trade or daytrade and your stop is 10 cents as an example, and the stock is 3.00, you could buy $3000 of stock and risk only 1% of your capital.

    If you hold overnites, your risk is much higher, and you would risk alot less.

    For your example:

    Position Size = (1% of Equity) * Buyprice/(.1 * Buyprice)

    .01 * 10000 * 100/(.1*100) = $1000.

    Therefore you can afford to buy $1000 worth of a stock, risking 1% per trade.
     
  3. elit

    elit


    I think I understand your point about using leverage to diversify; To use it in order to be able to minimize the risk, by dividing the capital on more trades, instead of just risking more capital in one trade in order to gain more. Is this correct?
     
  4. yes
     
  5. riskin' 2% or even 1% on a trade if it's intraday it's madness. u can do that if the stock u are tradin' has huge momo and even then dont make much sense most of the times. u bump into a few losers and there u are...down 5k or 50% of your acct. not a pretty situation innit.
     
  6. FutTrd

    FutTrd

    you people are nuts

    and bitstream, what's wrong with you man,

    look I risk 25% of my portfolio, on single trade on single intrument

    but than again I have insider info

    nevermind :p
     
  7. than again?
    never mind.
     
  8. elit

    elit

    Thanks for your input, Bitstream. I'm more of a position trader, but I'm planning on looking into intraday just to see if it fits me.

    Do you consider leveraged trading to be for intraday trading only or would one use it for holding positions overnight, I understand that there are interest to pay if holding overnight.
     
  9. position tradin' it's a whole different matter, u dont need have to use tight stops and doin' so usually results into money trown away into expensive insurance. it's intraday that u gotta keep it tight...happened to me at times i lost more than 2% on a trade and with some size it's a huge hit from which u may not recover for days. not worth it.

    u take advantage of leverage once u know what u are doin'.