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SimSpeed · 17-09-2004, 23:44

I approach this subject from a standpoint of “Risk/Reward” rather than margin or account leverage ratios. I think understanding “leverage” in its common terminology is too confusing to most everyone but the professional manager/trader. Proper application of money management (i.e., correct use of “leverage/margin”), is of course absolutely critical to stay in the game, but I don’t necessarily believe newbie traders need learn initially, all the nuances of leverage/margin to be able to trade safely and effectively.

When planning your “trade system/money management” program; the first thing you better know is: “How many trades in a row can I lose before I go broke.” Obviously, the answer depends on how large is your trading account and how much of it are you placing “At Risk” on each trade. Are you comfortable risking 1%, 100%, or something in between? The answer lies entirely on each person’s goals for account growth; periodical income withdrawals; and one’s personal tolerance to stress.

Did you know for example, that a $500 trading account with a 10% risk factor could withstand 19 consecutive (-25 pip) losing trades before going broke? We are all aware there are trading strategies out there that have 50% win/loss ratios with maximum losing trade draw downs far short of 19 consecutive losses. Knowing that to be true, why should I limit my trading to some arbitrary leverage ratio that doesn’t take these factors into consideration?

The thing to understand I believe, is not how much or how little am I leveraged on any given trade (in and of itself irrelevant,) but more importantly, does my current “level of risk” conform to, or fall within the win/loss parameters of my known trading system? And if so, am I maximizing my income potential with 10% risk (as exampled above), or can I afford a greater degree of risk to increase my trading account while producing a weekly income stream to live on? The answer is yes if all the relevant factors are taken into consideration and dynamically plotted trade by trade.

17-09-2004, 23:44	#37
SimSpeed Money Management Join Date: May 2004 Posts: 327 Downloads: 0 Uploads: 0 Rep Power: 0	Risk/Reward I approach this subject from a standpoint of “Risk/Reward” rather than margin or account leverage ratios. I think understanding “leverage” in its common terminology is too confusing to most everyone but the professional manager/trader. Proper application of money management (i.e., correct use of “leverage/margin”), is of course absolutely critical to stay in the game, but I don’t necessarily believe newbie traders need learn initially, all the nuances of leverage/margin to be able to trade safely and effectively. When planning your “trade system/money management” program; the first thing you better know is: “How many trades in a row can I lose before I go broke.” Obviously, the answer depends on how large is your trading account and how much of it are you placing “At Risk” on each trade. Are you comfortable risking 1%, 100%, or something in between? The answer lies entirely on each person’s goals for account growth; periodical income withdrawals; and one’s personal tolerance to stress. Did you know for example, that a $500 trading account with a 10% risk factor could withstand 19 consecutive (-25 pip) losing trades before going broke? We are all aware there are trading strategies out there that have 50% win/loss ratios with maximum losing trade draw downs far short of 19 consecutive losses. Knowing that to be true, why should I limit my trading to some arbitrary leverage ratio that doesn’t take these factors into consideration? The thing to understand I believe, is not how much or how little am I leveraged on any given trade (in and of itself irrelevant,) but more importantly, does my current “level of risk” conform to, or fall within the win/loss parameters of my known trading system? And if so, am I maximizing my income potential with 10% risk (as exampled above), or can I afford a greater degree of risk to increase my trading account while producing a weekly income stream to live on? The answer is yes if all the relevant factors are taken into consideration and dynamically plotted trade by trade. Last edited by SimSpeed : 04-02-2005 at 23:48.