How to get a proper True Leverage?

Hi All,

It seems to me that there should be several factors that would be factored in, to determine true leverage. A trader with larger gains and few losses should not operate at the same levels as a trader with few and smaller gains (examples follow).

Trader "A" has an average gain of 10 pips and an average loss of 5 and wins 60% of the time.

Trader "B" has an average gain of 30 pips and an average loss of 10 and wins 85% of the time.

Trader "B" can afford to take greater risks than trader "A".

Is there any known formula that can help guide a more reasonable use of capital and fine tune the true leverage amount?

Thanks in advance
BR

When determining the optimal % of capital to risk it is more important to look at the Max Drawdown than the % wins or Avg win/loss. If you know your max DD which is determined by the max consecutive looses then you can chose a % that will allow you to survive that DD period without abandoning ship. To do that however you would need a decent sample of trades. You do not want that percentage to be too high because when the DD period comes along it will cut deep into your account. You do not your % at risk too small because it will take you too long to recover. It is all about balance and knowing your system and risk apetite well.

When I was trading equities I felt comfortable using DD and margin requirement as my total capital number, however I was able to create such a diversity with non-correlated stocks I didn't really have a DD to speak of. I was running 20to1 leverage with most of the stocks being daytraded.

Reading a great many posts here, percent of capital per trade, true leverage and other factors I did not use in equities are discussed as being more important than DD.

I am not at a point of comfort in terms of all aspect of my money management. Although I would say I have been trading through what I think history will show us, to be one of the most difficult trading environment to hit in decades, I have only been trading this method live for a couple of months and don't think my data sample is large enough with 100 +/- trades during that time.

So the question is how to get to a reasonable balance of risk/reward?. OR is it so personal that one needs to start with ultra conservative values and over time bring those values up?

Thanks
BR

As with anything in trading determining the pos size is a matter of beliefs. I am a mechanincal trader. Therefore when determining the pos size i am trying to get the max posible reward while keeping the risk at an acceptable level. I would write a system and test it. If it shows promise then i optimise the system to see how robust the settings are. After the optimization is complete i test a few of the settings i have liked on unseen data. Once i have the desired settings i test on a set period and save the results. This process is repeated for all the pairs i will be trading the given system with. When all is done i import the results in excel. What i have at that point is the performance of the whole portfolio. I would then run a MC simulation on that data to determine the worse case DD and determine which pos size would allow me survive it and recover the fastest.
The above is more or less how i do it. Most of the systems i develop never go through all the steps since are not profitable. For the once that are, this is how i do it.
This of course would be differrent for different traders. The above works for me. It allows me to be objective and pick a pos size that makes sence for my strategy, as oposed to choosing an arbitrary number (2%,3%) because someone said so.
Regrding your experince with the stock market. In FX you can get a lot more leverage which could mean more profit when the leverage/margin is corectly understood and used. Also it will be a lot more difficult to build a large, diversified, non-correlated portfolio when trading currencies. Therefore the DD in my experience has always been an issue when determining the pos size.

Just my thoughts.

Exactly the same feelings. Previously all my work had been signal generating systems. Every decision and rule was based on 100% quantitative values.

I guess I will need to play it conservitive until I get a large enough sample of trades as the method I am using is not / will not become automated.

Thanks for taking the time.
BR

Whether the system is automated or not one should know it well. You can get a general idea of how the system will behave from that. If it has a 200 pip TP with a 50 pip SL such a system will most likely have a low Win % and be more prone to DD. This is just one example. This should be the starting poing. From there you wait untill you have a DD of any significance and adjust your pos size acordingly. You would probably need several instances of DD before you could bring your pos size to a optimal value. Until then being somewhat conservative is the best bet.
Good Luck!