Overleverage

The Trading Process - Don't Overleverage - Step 13

Probably the biggest mistake I see traders make is with overleveraging.  Basically, their "bet" size is too big for their account.

I realize that many small traders almost have to overleverage (or else not participate at all), but some people mistakenly think if they have a $10,000 account, and day margin is $500, they should trade 20 contracts!

As a trader, your first goal is really just to stay in the game, until you have a proven method.  Until you reach that point, staying small is the way to go.

With any new system I trade, I almost always start with 1 contract.  As profits accumulate, so do the number of contracts I trade.  But, it is a slow process.

So, how do you know if you are overleveraged?  Here are a couple of guidelines:

1.  Risk only 1-2% of your account on any trade.  So, if you have $10,000 account, your max loss should only be $100.  Due to market noise, $100 is very, very small, and maybe you should wait to trade when you have more risk capital.

2.  Your account size should be 2-3 times the initial overnight margin requirement, AT A MINIMUM.  So, for example, Euro currency initial margin is currently $4,050.  If you have $10,000 - $15,0000 account, and trade 1 contract, you MIGHT be OK.

3.  If you go to my website (www.kjtradingsystems.com) and sign up for my e-mail list, I'll send you a link to a Monte Carlo spreadsheet.  Simply enter your trade results and your account value, and you'll see what your risk of ruin and median drawdown over 1 year of trades is likely to be.  If you find your risk of ruin is say 75%, you are overleveraged!

Just remember, it is better at first to trade very small.


Next: Execute Flawlessly