Absolutely! And my other point, in the spirit of understanding what is true, is that the majority of professional daytraders use leverage and they are smart to do so. Obvious reasons. And, of course, as I think you are getting at, poor risk management with leverage has ruined many traders, especially new ones.
Can you help me with this? 1. Why is it smart for obvious reasons? Its not obvious to me. 2. How is leverage even used? If youre trading position size based on percentage of your account how is it good or bad? To me it is a confusing term. If youre in for 2% or greater than your account size, then lets not beat about the bush - its not called 'leverage' its called 'stupid'. Im sure there are many people that regularly go more than that but IDGAF what others do, my only interest is not going too deep into drawdown when its my turn to take a string of losses.
"They have an edge and wish to magnify it, and yes, they must manage their risk." Edge x volume is a key factor. If a trader has a 30 000 account, as soon as they put more than 30, 000 in play they are on leverage. This is important to what I am saying. ___ In the beginning, learning but no edge, perhaps: Simulator, then, 100 shares/ minimum positions. ____ Profitable trader, example situations: Opening order traders, like Lescor, put over a million worth of orders out but not get filled on most. Pair and deal/arb traders often put on numerous positions. Position traders might put on multiple positions. I do not know true scalpers any more (not saying there are not any), but to make things worth their time they may need larger size than their account. _____ Let's say someone traded only one position at a time and earned a penny a share; two pennies round trip. Say they have 30, 000 in their account and they buy 1000 shares of a 30 dollar stock. Their expected "earn" would be only 20 dollars. On individual trades they may make more or less. Well.. if this trader could make lots and lots of these $20-earn trades they would do well with no margin. ____ A person with very small money who wishes to make decent money must use leverage. A person with a lot of money may feel they do not want to tie up a large sum in a daytrading account. _____ If someone wants to tell me they make a huge amount per share traded (they have very special methods, perhaps) then of course no leverage is needed. Or if they can do many, many short trades they can grow with no leverage. Summary: If a winning trader wants to meaningfully grow their account with no leverage they must either 1 Have a huge edge (how hard is this?) 2 Do lots of volume on a smaller edge 3 Give up enormous amounts of time working for small amounts and save. (#3 is not possible if one lives out of their account and is not optimal if one has a worthwhile edge) 4 Accept a risk of ruin higher than many would think. Or.... a combination of the above. ___ Side Note: There are rare times it is ok for an experienced winning trader to risk blowing out a small account because of the value of his time. Examples: He has other ways to make meaningful money or has a large income. (This mnd set can be dangerous and is often a front for crazy gambling)
On reflection, Some winning traders who use margin are not really leveraged in the way many may think in that they have money and assets outside of their trading accounts that they are rationally willing to draw from. As a side note: prop firms servicing licensed professional traders would not exist if they did not offer leverage.. or back traders as Shoenfeld once did. Grantx, thank you for your question.
Thanks for explaining. Im a futures trader so anything to do with options or shares goes over my head. Way too complicated for me. I can understand how noobz get smoked in forex because some of the leverage available there is simply outrageous but in the futures market there is a layer of protection albeit slim. You have to have the initial margin and on top of that an intraday margin in order to open a trade. For every contract you need to post the intraday margin so if you want to go large its quite difficult unless you have the money available in your account. I havent actually done a detailed comparison between futures and forex but I have seen brokers offering 400:1 leverage.
margin is only needed when people SELL options-and most people try to do that thinking they are clever -like the notorious 'Karen the super trader'. Options are complicated which is why I love them-we have a site but it's for the UK where retail options trading is about as welcome as cholera-we take money off the institutions as they trade badly. Optionsinvesting.co.uk wasalready in existence due to a guy who is now my trading buddy. It offers weekly trade ideas and some simple options education- but in the US you have EVERYTHING! We have nothing here, I learned the hard way. And I'm still here after 16 years. Enjoy the journey with whatever you trade
To reduce leverage.Boy have i seen for the first time, i was set years ago, but the leverage has always clouded my vision.
What was the ***last*** thing you had to master before becoming profitable? Realizing that the 'last' thing I mastered will not be the last thing I'll master!!