Small Account Size Intraday Leverage/Risk Question

I would like to trade intraday as it seems to fit my schedule and style better, and taking a look at the 5min Intraday System recently posted by Phillip Nel (http://www.forexfactory.com/forexfor...ad.php?t=11854), it seemed promising.
However, when applying your formula for money management I get the following:


Account Size = $1000
Percent Risk = 1%
Amount Risked = $1000*.01 = $10
Stop size = 6 pips
Pip value = .10 (10 cents on a micro account)
Total pip value = 6 pip stop * .10 = $.6
Position size = $10/$.6 = 16.67 micro lots (round down to 16)
Resultant pip value = 1.6 ($1.60 per pip)
Resultant leverage = 16000 position size / $1000 account size = 16:1


Winning Trade (Take Profit Point): 9 pips = $14.40
Losing Trade (Stop-Loss Point): 6 pips = $9.60

This seems to contradict entirely the points you are trying to drill into the heads of beginners like myself. The leverage is much much higher than you recommend.

However, with my logic (and this may be flawed), I would only need to win 50% of my trades to at least make a profit, and would still be risking only 1% of my account. Is this wrong?

So my question would be this: how would I be able to trade systems with small stop-loss points and TP points effectively with a small account balance? Is this even possible?

Thanks in advance for your time!

Your calculations are correct. The only way to reduce the leverage is to either use a larger stop, or to decrease your percentage risked.

You are also correct about your winning percentage. As long as you win 50% of your trades, you will win over the long haul.

And, by risking just 1%, you can have 69 consecutive losses before losing half of your capital. However, I agree with Rob Booker when he said that if you allow yourself to lose more than 25% of your account, you are an idiot. (His words, not mine). This means that a 25% loss of capital should alert you to the fact that something is wrong, either with your method, money management, or your discipline/emotions/psychology etc. 29 consecutive losses will take you down 25%.

If that happens, you should quit trading, identify the problem and fix it, and then work to raise the money to replace the loss. If you have to deliver pizzas and mow lawns to get the money back (sweat equity), you will be more careful the next time you trade.

Now, while 16:1 leverage is higher than I recommend for a beginner, you can indeed trade the setup you described as long as you can endure the rollercoaster ride of your equity curve with large drawdowns. Given a $1000 account and trading a micro lot, your gains and losses are, as you said, in the ballpark of $10. Hardly enough to break a sweat over, but if you scale this up to a large account, losing hundreds or thousands on a trade is much harder to stomach.

I suggest you demo exactly as you've outlined above. If profitable over about 50 trades, then give it a shot on a live account. This will be good experience for you as the most you can lose is $250. (You want plain or pepperoni?)

You seem to have your head screwed on straight. Give it a shot.

Dial

Thank you so much for your reply Diallist. You always provide such insightful information and guidance for noobies, I very much respect that and thank you for it

I'm opening a demo account now, we'll see how this goes