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Safe way to use leverage

tech/a

No Ordinary Duck
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Posted a piece on this here for those interseted in leverage.

https://www.aussiestockforums.com/forums/showthread.php?p=46469#post46469.

Most trade the Pennies because trading blue chips is like trading in slow motion the account increases at a similar rate.

The volatility of the Pennies and the opportunity to pocket a 50% or more winner is alluring---so thats where most go.

Bluechips will possibly more predictable just wont bring a decient return!

with LEVERAGE--THINK AGAIN.

Success may not be the leverage buy HOW ITS USED.
 
Try using a geared share fund for superannuation. That way it gives you that extra leverage that is needed to gain returns, far greater than the current 10 to 20% on normal super funds. Returns have been running at 20 to 80%.
 
Next is maximum string of Losses and risk.
Again mine is 1% risk and 12 the longest string.
Taking CFD's at 10x my risk becomes 10% and 12 straight then Im ruined.
Without this knowledge I could be trading a highly profitable method (Which it is) and going broke!! simply because I am not in the position to manage my business because I dont have CRITICAL INFORMATION.

This is perhaps the most important point in leveraged trading and should be discussewd far more often. WD Tech.

Essentially, this is capacity risk.... one most never consider.

But those who have tried martingale staking plans will have run into this one ;)

Cheers
 
wayneL said:
This is perhaps the most important point in leveraged trading and should be discussewd far more often. WD Tech.

Essentially, this is capacity risk.... one most never consider.

But those who have tried martingale staking plans will have run into this one ;)

Cheers

Hi Tech/Wayne,

I think this is what i am searching for, this capacity risk that you mention Wayne?

Just about to read your post Tech so i will comment there.

Cheers Stink

Its like a hunt for something but you dont know what it looks like yet :rolleyes:
 
Stink tech/a is basically talking about what i mentioned before to you.

Not risking more than your account can handle.

i.e 1% risk per trade can allow you to take 10 trades and if all go bad you can still come out with 90% of your bank intact.

Risk 10% per trade (10 times the original amount) and have 10 trades on, and all those trades go bad then basically your bankrupt

Remember start small (even 0.5% risk per trade) to learn the ropes. After that its a numbers game
 
Ah yes but there is more.
It takes effort on the traders part.
IE quantifying what that risk is before and after leverage.
Most dont know what their drawdown on a methodology is.


Its pointless knowing a set amount like the often bandied around 2% when you have no idea how many trades typically using your methodology could string together as a string of losses.

You absolutley MUST know what your drawdown is over a long period of using your method.Particularly initial drawdown.Remember a 50% drawdown in any trading equity will require a 100% profit JUST to break even again.
Often a 50% drawdown will render a trading method un profitable due to under capitalisation!!!!

It takes effort time and patience to learn how to run your trading business---its not easy and will require an investment both in time and money---as any decient business would.

Most want the profit of a sound business while running a business which is far from professional or profitable.

This is where you start---learning how to run a business.
What are the key attributes?
What do you actually need to have as a busines owner to maximise your chances of being profitable?

Get this right and you'll have the best opportunity at being profitable in any venture you become involved in.
By pass it and you'll likely become a statistic!! 90% of Businesses fail in the first 3 yrs.
 
Thanks Guys,

Tech you will see i posted a reply to your other thread enquiring how you work out this maximum drawdown?

I do understand what you are saying about knowing how to run a business profitably etc. But if the maximum drawdown is known then isnt the amount of money that you have meaning less? I mean sure you could have more open positions etc but isnt the risk the same whether i have 10k or 100k?

I am sure when you explain to me how to calculate drawdown i will understand.

Ageo, i agree 100% with what you are saying and am just trying to work out what that amount is.

Cheers Stink
 
stink

I am sure when you explain to me how to calculate drawdown i will understand.

Drawdown;
Starting capital $10,000
Buy $10,000 equity on Monday
Position current market price on Tuesday = $5000 = 50% drawdown

If you are leveraged by *2
You are in essence worth $0.00
As $10,000 * 2 [leverage] = $20,000 capital - 50% drawdown = $5000 * 2 = [-$10,000] = $0.00

Therefore, unless you are going to be profitable.
Not think, hope, flip a coin, you would be best to avoid leverage, as you will go broke * leverage faster.

jog on
d998
 
tech/a said:
Ah yes but there is more.
It takes effort on the traders part.
IE quantifying what that risk is before and after leverage.
Most dont know what their drawdown on a methodology is.


[/B]You absolutley MUST know what your drawdown is over a long period of using your method.Particularly initial drawdown.Remember a 50% drawdown in any trading equity will require a 100% profit JUST to break even again.
Often a 50% drawdown will render a trading method un profitable due to under capitalisation!!!!


And then there are discontinuous events that your system doesn`t know. :eek: Some people call them calamitous, catastrophic etc.
 
ducati916 said:
stink



Drawdown;
Starting capital $10,000
Buy $10,000 equity on Monday
Position current market price on Tuesday = $5000 = 50% drawdown

If you are leveraged by *2
You are in essence worth $0.00
As $10,000 * 2 [leverage] = $20,000 capital - 50% drawdown = $5000 * 2 = [-$10,000] = $0.00

Therefore, unless you are going to be profitable.
Not think, hope, flip a coin, you would be best to avoid leverage, as you will go broke * leverage faster.

jog on
d998


Thanks Duc,

I understand what you have said there but surely what you have posted is not a practical example of how someone in my position would use leverage?

Stink
 
Stink

I understand what you have said there but surely what you have posted is not a practical example of how someone in my position would use leverage?

No, most likely, you would use a form of position sizing money management.
In essence, you would reduce your position size to reflect the multiple of the leverage.

By way of example; same $10K, using *10 CFD's contrasted with no leverage.

*without leverage $10K of shares @ $1.00 [= 10K shares] stoploss @ $0.90 = $1K risk
*CFD's same purchase price $1.00; $1K risk = 1000 contracts @ $0.90 stop

There is in essence no difference.
So why leverage?

The reason is that should you exceed the cost of the leverage & have a high expectancy, you can supercharge the returns. The type of leverage is a far more important consideration

jog on
d998
 
Substitute ducs figures for lesser amounts and you'll get the picture.

One must use a bit of your own grey matter,we cant do all your thinking!!

is not a practical example of how someone in my position would use leverage?

No but it gives you the basics.

Simply WHEN YOU DO KNOW wgat your initial drawdown will likely be then you would be sure to hold leveraged positions so that in the event of all failing you didnt destroy your equity.

As an example T/T has a maximum INITIAL drawdown from testing of 6-9% based upon Montecarlo analysis over 20000 portfolio's.
Therefore with a maximim leverage of 2.5:1 or 22% of initial equity then I was/am comfortable to run it.

I trade 3 Systems all similar and I have never reached maximum initial drawdown.
I know of 18 users of T/T who keep in touch with results and none have reported reaching initial D/D levels or ever recieving a Margin call.

Snake catastrophic loss is always a possibility no matter how you trade.
Diversification in Investment type is I feel the best defence,but then again Catastrophic means just that and could mean anything from a huge hike in interest rates to Oil Shortage to a collapse in the western monetary system.

Cant bury our heads in the sand because of what "Could" happen we can only control that which we have influence over.

More later.
 
Just as an aside if you risk 10% of your capital per trade and keep losing then 10 straight losses whilst painful isn't going to wipe you out.
Think about it :)


ice
 
If talking position sizing then possibly.
If talking risk then no.
 
stink said:
Thanks Duc,

I understand what you have said there but surely what you have posted is not a practical example of how someone in my position would use leverage?

Stink

All the answers to your questions are summed up nice and concisely in this book.
 
tech/a said:
Substitute ducs figures for lesser amounts and you'll get the picture.

One must use a bit of your own grey matter,we cant do all your thinking!!



Tech,

I was asking the question in relation to cfd's mate, i am not stupid i can do the basic maths of it but didnt now how the affects were considered when using leveraged instruments.

I had already stated that i new how to work it in a normal stock situation.

Yes i ssumed after ducs post that substituting with smaller amounts gives you the same result, just wanted to ask the question in reference to leveraged instruments.

Anyway sorry if i have wasted your time,

Stink
 
ice said:
Just as an aside if you risk 10% of your capital per trade and keep losing then 10 straight losses whilst painful isn't going to wipe you out.
Think about it :)


ice
hhmm ok lets go through this.

Starting capital $10,000.

Trade 1 Max risk 10% ($1000) - lose

So 1st trade is a $1000 loss.

If you lose the next 9 trades then obviously your $10000 down which means bankrupt.

please explain? :rolleyes:
 
Ageo said:
hhmm ok lets go through this.

Starting capital $10,000.

Trade 1 Max risk 10% ($1000) - lose

So 1st trade is a $1000 loss.

If you lose the next 9 trades then obviously your $10000 down which means bankrupt.

please explain? :rolleyes:

If using a percentage of your current balance, not your initial starting capital...

$10k - 10% = $9k
$9k - 10% - = $8.1k
$8.1k - 10% = $7290
etc.
 
stink said:
Thanks Swingstar,

I might have to get me a copy this afternoon.

Cheers Stink

It's short and to the point. Should be able to get through the most important stuff (first two parts) within an afternoon/evening. I don't suggest that's all you should read, but it'll answer your questions on leverage and drawdown etc., and also explains CFDs and how you should use them.
 
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