Gordon Gekko kind of brought this up a while back, but the discussion turned mostly toward day trading.... Concerning swing trading only, if I had 100K account, and wanted to use 10K for each position, with 5% stop loss, that would only leave me with 10 possible positions at once, risking a total of 1/2% of my account per trade. If I use 2:1 margin, and still risk 10K on each position, with a 5% stop loss, that allows me to carry 20 positions at once, while keeping the total risk to 1/2% of my account per trade. Doesn't this use of margin mitigate most of the "beware of margin" mantras? Because I'm not increasing my risk per trade, I'm simply taking on more of the same risk. In the above example, using 5% stops on 10K positions in a 100K account, I'd have to be wrong 200 times to blow up. With that kind of room for error, I'd say carrying 20 positions at a time instead of 10 isn't that much riskier. Plus, if you have positive expectancy, the more positions you are able to take the better. Of course there's the issue of freak gaps. However, those usually happen as a result of company specific news, meaning it's unlikely multiple positions will experience freak gaps at once, blowing up my account. So while having more positions open at once would technically make me more vulnerable to freak gaps, it's unlikely that simultaneous gaps will happen, save a nuclear attack. Even then, in the event of some freak disaster, if all 20 of my 10K positions in my 100K (leveraged to 200K) account gapped down 50%, I would only be down to zero, with no debt. However, the odds of a portfolio of 20 stocks all gapping down 50% at once is so negligable it's not even worth considering. So, am I missing some subtle mathematical risk here? Or is taking on more swing positions in the above example using margin a good idea?
One thing you may be missing is the chance that margin calls at the worst possible times (which is always when they occur) forcing you to sell when you don't want to. If you're trading on a cash-only basis, you don't have to worry about that.
Ok, then instead of holding the max of 20 positions in your leveraged account, instead hold only 18, with the left-over cash waiting to cover margin calls.
If I'm reading this right - it looks like you would have your risk at 1/2% of 200k (instead of 100k) which is 1% of 100k if not - ignore me Natalie p.s. you weren't kidding when you promissed a flood
Ok, I'm confused. You're probably right. Here's my thinking. -10K positions of a 100K account with 5% stop loss is 1/2% total risk. -10K positions of a 200K account with 5% stop loss is 1/4% total risk, but because half of that 200k isn't yours, the risk is doubled, so 1/4% risk is really 1/2% risk. Wouldn't the risk be the same in both cases, both 1/2% risk?
I don't think what your are suggesting is a problem. I swing trade with a similar approach. However, I am rarely margined out. Just a little too aggressive for me. Plus, I hate to see a great trade present itself and not have any dry powder. IMHO the key holding overnight is to get as market neutral as possible. I try to have some balance of longs and shorts. I would never want to have significant long exposure overnight in this market. As far as risk per trade, I think 1-2% is fine as long as they are not highly correlated trades. Being long 10 different Semis is odviously not a good idea. Being long the market and short gold and defense stocks would not be good either. hope that helps
All this math is too confusing for me. Please keep spending your time on it. Sounds like some sort of risk control methodology. Eventually, you'll figure a way to lose your money in discrete snippets with an asymptotic flavor.
You are talking about taking 20 positions each of 10k (leveraged using the margin). That makes 200k total. each with the 5% risk Natalie
Another thing to consider is that even though your percentage risk per trade is only 1/2%, if you're not margined, the percentage of your equity risked is 5% at any given time, since theoretically all 10 of your positions could stop out at once. In other words, you could lose $500 times 10, or $5000, or 5% of your equity. If you're fully margined, though, you could lose $500 times 20, or $10k, or 10% of your equity. The risk increases, but the potential gain increases. It's up to you to decide whether the risk/reward is worth it.
If every trade you take has a good risk/reward ratio, and you have positive expectancy on your side, why wouldn't you take as many positions as possible?