Hey guys hi from Andrea Unger.
Sometimes I’m asked: “How much leverage do you use?”
In my opinion this question is really dangerous.
It shows sort of a wrong attitude, a wrong approach to trading.
Just because with the leverage in mind, how much leverage, it seems like we are trying to maximize the money we have at our disposal, which is normally the money we have in our account.
And if we want to maximize the effects of this money, it’s obviously because we think about potential profits, which is fine of course, but when we think about profits, we start thinking the wrong way, because the proper way,(I mean the proper way I suggest and the proper way I see successful traders follow is always start thinking about losses first and then the profits is a second step).
What does it mean?
It means that when you open a position, you should take care of how much that position can lose and you should dimension that position, you should choose a proper size.
So that a certain level of losses is not exceeded in your account.
Let’s say I have an account of 10.000 dollars and I decide as I suggest, which is a good rule, to risk no more than 2% of this balance in next trade.
2% of 10.000 dollars is 200 dollars.
So, now I have my position, on Forex for example, if I use a full lot and that full lot has a stop loss, because the position, that my trade is supposed to have a stop loss of 50pips for example, then I know that with that full lot I will be losing 500 dollars, normally.
So how much should I therefore size my position so that my loss is of 200 dollars instead of the 500 in a full lot?
Obviously, a full lot is not the right choice.
I should work with a certain number of mini lots or in some cases micro lots.
I don’t tell you how many, because I want you to do it yourself or to prepare an Excel, a small Excel spreadsheet where you just put some numbers and you get the results.
But it is important, really important to start from this point of view.
How much am I willing… willing… am I prepared to lose. Willing, I don’t think anyone is willing to lose.
How much am I prepare to lose?
How does my trade look like?
My trade has these rules, so and so many pips, ticks depending on the instrument stop loss.
How large or small can my position be to keep my losses within the limits that I want to put.
The limits are subjective because they depend on your risk profile, but obviously, I always suggest, to keep these limits very small, at least in the beginning, but also later on.
2% is always something which seems reasonable, it’s not small.
2% is already something a little bit bold, in my opinion.
So, I don’t know how much leverage I use.
Really! Because I never start thinking about leverage.
I checked, I use Futures, you know, on Futures these are leverage products themselves.
I checked from time to time and I saw that, it in some days when I have many systems that work in many open positions, my margin requirements are more or less about one third of the total amount of my account, which means that actually I’m not really putting too much gas in my work.
I am not running too fast because one third of the total account is obviously not too much.
So, somebody could argue: “Yeah but why do you keep all that excessive money, the two thirds you don’t need on that account? You could use them elsewhere! “.
Why? This is maybe a topic for another video because it’s impossible to deal with this in a couple of minutes, it is not reasonable.
In reality to open that kind of size I need that money, because it starts from the risk based on that money.
I don’t need it physically, because I don’t need it to be there to let me open the position, but I need it as I am referring to it as my balance and based on that, I decide how much I can trade.
As said, I will cover this to a wider extent on a second time and it will be interesting.
But for today, keep in mind: always start thinking about your losses first, try to limit these losses as much as possible, try to limit that within a reasonable amount, where reasonable means something you can easily cope with and then if your strategy is well prepared, profits will take care of themselves.
Losses first, don’t think about leverage think about how much you can lose, how much you can afford to lose, how much is not killing your account If you lose that or if you lose that more times in a raw.
That’s it for today. We’ll keep in touch next time.
Ciao from Andrea Unger