Leverage: a tool that should not be taken lightly!

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Re: Leverage: a tool that should not be taken lightly!

Postby forex_champion » Sat Apr 17, 2010 3:02 pm

Finally I've come to realize that this leverage lesson can be put in one sentence. The real question that people considering using leverage should ask themselves is not "how much leverage should I use" but more precisely "what is my per trade risk and then what is the position size that matches that risk". That will generate a tolerable leverage for anyone.

Good talk :wink: !

Forexchampion
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Re: Leverage: a tool that should not be taken lightly!

Postby forex_champion » Sat Apr 17, 2010 4:14 pm

Hi,

I think I have to disagree with you here. Because what I think that what would qualify a system as the best one out there would definitely be a combination of its pips gain over time as well the maximum drawdown it has on a given time. Like you said, profit is truly irrelevant because when it comes to certain capital sums, profit can become exponential. In my opinion, when it comes to calculating profit it's all relative like Einstein once said. A guy could make a fortune with an account of 10 000$ simply by risking more on every trade than the guy having a 100 000 $ account but who is more conservative. This is the main reason why I truly believe that the important thing is not calculating the profit generated by a certain system but more the total pips made. As you well said "you can make
$100 on 10 pips as easy as on 100 pips" but that is only because you are using different types of accounts. In a standard account one should have more money than in a mini account.

I guess that what I'm trying to say is that profit is a dependent variable because it depends on how much money your account has. On the other hand, the number of pips gained is an independent value because no matter how much money you have on the account, if you profit 100 pips your profit is still 100 pips regardless of your account balance. Let me give a clear example.

John and Mary are using different systems. After one month John gained 1000 pips and Mary gained 100 pips. However John had only a total profit of 1000$ while Mary had a total profit of 2000$. Does this mean that Mary's system is better than John's? No, actually it is the other way around because if both traders would have used the same capital and the same account, John would have a bigger balance then Mary by 10 times.

Another way to look at this is by thinking of playing in a casino. Professional gamblers do not value their success based on profit but more on total units won. The amount one bets later on is dependent of how much money you have. The important thing is the number of units since it is independent from your money. A unit is simply an amount bet that could represent any amount of money. Well Pips are actually the same. A mere 20 pips could easily represents 20 cents as it could also represent 2000$ or even 20 000$ whatever the sky's the limit. Anyways I hope you get my point...

Regards,
Forexchampion
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Re: Leverage: a tool that should not be taken lightly!

Postby forex_champion » Tue Apr 20, 2010 2:26 pm

Combined experience about right risk level can be summarized into: What makes you comfortable?


Yeah I guess they're right!

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