Leverage and You
Posted: Thu Jun 03, 2004 10:05 am
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).
- 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).