Leverage on managed account

[Bank Trader]

Don't listen to this guy losing 2-3% per trade is crazy. You shouldn't lose more than 5% in a month how can you justify losign 2-3% on a trade for 1-3 days??

[CGM1]

What is an acceptable daily drawdown?

[Bank Trader]

Daily drawdowns a function of your monthly/yearly targetted returns. Its really very simple. Leverage no leverage if you want to run a fund/money manager your going to have to attract investors. To do that you need to show a discipline that you stick to.

If you target a 30% annual return rate thats just 2.5% a month. If your looking to make 30% a year you have to basically shut down the fund when your down 30% in the year. That means that any month over 2.5% losses you should stop for the month.

If your looking to limit yourself to 2-3% a month then what is your daily drawdown?

This question depends on what type of trader you are. A position trader a scalper...ect. So work with 3% a month more than your daily drawdown.

[TRADERguy]

Originally posted by CGM1
What is an acceptable daily drawdown?

There is no simple answer for this one. Genarally those who trade other people’s money shoot for a smoother equity curve than people trading their own account. How much you risk per trade depends on many factors such as your ratio of winning to losing trades your risk reward ratio. Aceptable daily drawdowns will vary depending on your timeframe your tolorance for risk just to name a couple of factors. For a good discussion of all the variables that effect your profitability ways to calculate what kind of risk is appropriate read Trade Your Way to Financial Freedom by Van Tharp.

[SimSpeed]

I approach this subject a stpoint of “Risk/Reward” rather than margin or account leverage ratios. I think understing “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 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 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; one’s personal tolerance to stress.

Did you know for example that a $500 trading account with a 10% risk factor could withst 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 imum 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 underst I believe is not how much or how little am I leveraged on any given trade (in 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? if so am I imizing 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 dynamically plotted trade by trade.

[James]

Originally posted by Bank Trader
Don't listen to this guy losing 2-3% per trade is crazy. You shouldn't lose more than 5% in a month how can you justify losign 2-3% on a trade for 1-3 days??

LOL...So tell us how you suggest making 7% per month but risking less than 0.7% per day?

Let's see....

700 pips a month with risk less than 70 pips in total per day?

350 pips per month with risk less than 35 pips in total per day?

How many pips do you target per month?

This will be interesting since I know several "bank traders" most of them openly admit to being fly poor traders. There is no hallowed ground in those halls.

[falcon]

There would be times when monthly return target are achieved before the end of month just like the possibility of loss limit being reached.

Does the discipline factor apply in the case of achieving monthly target? Should operation be shut down if profits are achieved ahead of schedule if you are managing funds of clients? What would everyone do?

[TRADERguy]

Originally posted by falcon
There would be times when monthly return target are achieved before the end of month just like the possibility of loss limit being reached.

Does the discipline factor apply in the case of achieving monthly target? Should operation be shut down if profits are achieved ahead of schedule if you are managing funds of clients? What would everyone do?

Some firms money managers shut down after the goal has been achieved but I think it is a mistake. It's better to base your trading decisions on what is happening in the market. Sometimes the market is in a bullsh!t sideways mode in which it can be hard to make money if the range is not clearly defined or too small. Other times the market is trending hard. I think it is silly to stop trading during a month when the market is really trending just because you reach your goal. After all there will probably be times when you have trouble reaching your target so if the market wants to throw money your way it's best to be willing to take it.

Just my 2 cents

TRADERguy