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Brian Massey wrote:
> Many textbooks advocate never risking more than around 2% of your equity on
> any one trade. This means that with, say a $20K account in the futures
> markets, you can only risk $400-$600 on one trade.
Keep in mind that you also have to calculate the loss per equity used. In this
case it would be 20% - which would be extraordinarily high. I have no idea
what kind of move 16 ticks is - however, this is a case of being over leveraged
if one has to expose oneself to that kind of loss. It would be preferable,
from the perspective of managing risk, to never be exposed to more than a 2%
loss *period* - which would necessitate one limit oneself to the $400 loss
(which is plenty to lose on a trade anyway with a $20k portfolio). Now, it may
be that the upside return of this may not be enough to make the trade
appealing, once one is forced to limit oneself to this rule. However, by
extending one's portfolio to the max, a string of a few losses could easily end
up taking oneself out of the game. Although $20k is a very small amount of
money to trade with, it isn't that small that one necessarily need to shoot the
moon with it, taking on high risk in order to grow it to a more reasonable
size. What I would advise in these circumstances is to consider tightening up
the loss point - to say a level which would be above the normal noise level,
and choose one's entries more carefully, to attempt to minimize the chances of
being stopped out. If this still can't be made acceptable, then consider
trading something else.
Although futures allow more leverage, and one may be under the illusion that
one is far better off than, say, with the smaller leverage of equity trading,
one must consider the impact that this has on MM - especially considering that
one is stuck trading relatively dead instruments percentage wise. Since the
goal is to maximize return in the context of minimizing drawdown, it may not be
such a good idea to advantage oneself of high margin ratios. 4:1 might be as
high as I would want to go - and even then, by ensuring that the loss per trade
isn't any higher than it would be at 1:1 - instead using it to be able to trade
higher priced issues while using the same $loss level, and/or spreading it
around with more trades than one would do without leverage.
Regards,
A.J.
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