Margin kills

Discussion in 'Trading' started by bat1, Mar 11, 2008.

  1. bat1


    seems like when I trade on margin my performance
    get's worse..don't know the ''WHY'' but it does

    anyone else notice this?

  2. Tons of big hedge fund players are getting wiped up now for exactly the same reason. Carlyle: 32:1 leverage.

    Its the most common problem, and is due to lack of tolerance for drawdowns. Leverage only changes your magnification to moves in the mkt, and you feel (and are) like a big loser if you are overleveraged, often exiting trades that aren't bad with proper leverage in loss mode.

    death by 1000 cuts is magnified with leverage, and requires a more thoroughly thought out and quantified system to just -survive-.
  3. Three reasons:

    1. Geometric average can be negative. You need to choose a correct leverage (I plan to write a piece on this). There is a guy who wrote a book (a professor) and fell for this trap.

    2. You do not play in a deterministic and constant way. Impact point 1.

    3. You may do not understand well enough leverage.

    Read the article below and you will understand.

  4. You SHOULD dial down leverage now (or even stay in cash), as the market is choppy, and therefore hard to "predict".
  5. Leverage should only be used on a trading style that is consistently profitable. Secondly, usually one uses more leverage for shorter time frames for scalping intraday highs and lows. Otherwise, you need to step back and use smaller size and open your time frame to days or weeks, versus intraday.

    It sounds to me like you're underfunded. If you're underfunded, you're better off working for a couple years and building up a sizable account, otherwise that leverage will be tempting and will eventually wipe you out if you can't stay disciplined.

    I think that is the main reason many traders fail. They start with a small account with the dream of trading for a living, but get wiped out from small moves that were magnified by the leverage, even if their setups were good.
  6. No one says you have to trade on margin. Theres no law that dictates that you must trade on the exchange minimum.

    Free your self.....put up 100%

  7. bat1


    good point Rice, thank you!