[es] How to Handle Leverage?

[maildigger 10]

How do you handle leverage with the E-mini's? I'll use an example:

 

Lets say you have a 100K $ account

Lets say your max risk for a trade is 2% of the capital

Lets say you use a 2.5 point stop for ES

 

2.5 x 50$ = 125$

2% of 100K = 2000$

2000/125= 16

 

So your trading size would be 16 contracts (or for each 6250$ you take 1 contract). Is that a good ratio? When do you "become" over-leveraged?

[Eiger 10]

...When do you "become" over-leveraged?

 

There is a direct relationship between leverage, experience, and your trading psychology. It works like this: put on too many contracts before you are ready, and your ability to trade in a calm, mindful manner goes down the toilet. This is true for people just starting out as well as those who have been trading successfully for quite some time.

 

Richard Wyckoff had this to say about starting out day trading in his Studies in Tape Reading, published under his nom de plume, "Rollo Tape" in 1908/1910:

 

After a complete absorption of every available piece of educational writing bearing upon Tape Reading, it is best to commence trading in ten share lots, so as to aquire genuine trading experience. This may not suit some people with a propensity for gambling, and who look upon the ten-share trader as a piker. The average lamb with $10,000 wants to commence with 100 to 500-share lots--he wishes to start at the top and work down. It is only a question of time when he will have to trade in ten-share lots.

 

To us it seems better to start at the bottom with ten shares. There is plenty of time in which to increase the unit if you are successful. ...

 

Starting small, as Wyckoff advised, is a very wise thing. It demonstrates you are quite serious about your trading and that you look to model the experts. There is no shame in putting on a single contract in the S&P e-minis. There is also no shame in wanting to make $10,000 in the first week or two of trading - we have all been there (some of us more than once )

 

But Wyckoff's advise is sage: start very small and learn, regardless your account size. Learn about the market, price action, your indicators (if you use them), your own emotions as you trade day-to-day, etc. When successful for a period of time, increase your unit by another contract. See how that goes for a while. Then, if successful, add another, etc.

 

Follow this path proven by the great traders and you are likely to make good progress in your trading.

 

The very best of luck to you,

 

Eiger

[brownsfan019 17]

How do you handle leverage with the E-mini's? I'll use an example:

 

Lets say you have a 100K $ account

Lets say your max risk for a trade is 2% of the capital

Lets say you use a 2.5 point stop for ES

 

2.5 x 50$ = 125$

2% of 100K = 2000$

2000/125= 16

 

So your trading size would be 16 contracts (or for each 6250$ you take 1 contract). Is that a good ratio? When do you "become" over-leveraged?

 

What a 'good ratio' is for one trader may not be the same for another. In other words, how much leverage one employs is at the discretion of the trader and their tolerance for risk.

 

For example - I personally see no reason to carry an excessive amount of cash in a non-interest bearing futures account. Some brokers will pay an interest on $100k+ (usually only if you ask) and that interest is nothing to get excited about. Point being, for me I carry 'enough' cash in my trading accounts to trade the amount of contracts I want to trade and sustain any intermediate drawdowns. B/c of that, my leverage in terms of contracts traded for the account size would seem high at first glance. In the grand scheme of things the leverage employed is low but I just keep excess cash in accounts that can at least earn something vs. sitting there doing nothing.

[james_gsx 16]

I just pick the maximum amount of contracts allowed for my account, then close my eyes.

 

 

 

But in all seriousness, I'm the opposite of Brownsfan. In a $100,000 account, I prefer to have a large amount of cash on hand for my options trading biz. The reason being is completely different though, as it's geared towards a much more conservative approach. For a futures account, I have considerably less cash for much of the same reasons Brownsfan said, but I can tell you I'm a lot more conservative. Say with a $15k account, I won't trade more than 1 contract. The reason for only having $15k, is because it gives me wiggle room to make mistakes when I'm staring out. It really comes down to how it will impact your business, and whether or not you can emotionally handle the large amount of leverage or not.

[brownsfan019 17]

It really comes down to how it will impact your business, and whether or not you can emotionally handle the large amount of leverage or not.

 

That's really it. If you have a $50,000 account trading 20+ contracts and the swings will give you a heart attack, then you cannot do that. I know that I have X amount of cash over in the bank or wherever earning some interest and ready to go if need be. Others may not like seeing their P&L and statements swing 10% or more daily based on the $ in the account.