This is a potentially pointless exercise in understanding the interaction or lack there of between the following:
- traders’ risk inclination,
- leverage in futures trading,
- synthetic physical positions.
Consider the following on a generic long term trend following system, just like aberration for example. You have an entry order signalled for light crude oil futures traded on NYMEX:
- buy at $30 stop, if filled place stop loss order to sell at $27.
- the theoretical expected risk on this trade is $3
- you have capital of $30,000
- you position size using a fixed fractional method that references the initial open risk ($30-$27)
- light crude is the only market that you trade.
- you apply your own preference for risk per trade.
Is capital of $30,000 enough for you to take this trade
My answer is no, what is yours? (if you don’t mind me asking).
Leverage and You
Leverage and You
Last edited by damian on Thu Jun 03, 2004 10:21 am, edited 1 time in total.
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- Roundtable Knight
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Crude is $30 per barrel, the contract is for 1,000 barrels, so at the current price, each contract represents $30,000 worth of crude oil.
You have exactly $30,000 in your account. You only trade this one market. So if you decide to trade 1 contract, you've got an unleveraged position: $30,000 in your account, controls $30,000 worth of crude.
If the position goes against you, you could lose $3,000 per contract. If you decide to trade 1 contract, that's 10 percent of your account.
Nothing is stated about what you stand to gain if the position goes for you, except that it's a typical longterm trend following system. Probably that means 40% wins, avgwin/avgloss = 3.0.
For 1 contract it looks sort of like this: 40% chance of winning, 60% chance of losing. If you win you receive +30% of your account. If you lose, it's -10% of your account.
You could see what the Kelly optimum betsize is, for a coinflip game (which Crude Oil is NOT), and compare that against 10% (for 1 contract), or 20% (for 2 contracts).
You could analyze how many losing trades in a row you might incur, and see whether you feel comfortable losing 10% of your account, that many times in a row.
You have exactly $30,000 in your account. You only trade this one market. So if you decide to trade 1 contract, you've got an unleveraged position: $30,000 in your account, controls $30,000 worth of crude.
If the position goes against you, you could lose $3,000 per contract. If you decide to trade 1 contract, that's 10 percent of your account.
Nothing is stated about what you stand to gain if the position goes for you, except that it's a typical longterm trend following system. Probably that means 40% wins, avgwin/avgloss = 3.0.
For 1 contract it looks sort of like this: 40% chance of winning, 60% chance of losing. If you win you receive +30% of your account. If you lose, it's -10% of your account.
You could see what the Kelly optimum betsize is, for a coinflip game (which Crude Oil is NOT), and compare that against 10% (for 1 contract), or 20% (for 2 contracts).
You could analyze how many losing trades in a row you might incur, and see whether you feel comfortable losing 10% of your account, that many times in a row.