Margin/Risk Management/Keeping Profits

July 30, 2008 at 4:32 pm Leave a comment

By FX Insights

Margin/Risk Management/Keeping Profits

At the end of this past week, a few reoccurring questions came up in the chat, so I’m going to make a thread to specifically address each one.

What you’ll read here is simply me explaining my trading style and how I do things based on the training I’ve received under Cisco and how I’ve used his training to develop my own style.

I won’t claim my way is the best way or the right way, it’s not a matter of right or wrong, this is just how I do things and it works for me with much success…

Margin and Risk Management…

First and foremost, it is my job to be a risk manager/money manager, and secondly, I am a trader. If I fail at risk management, I fail as a trader, so risk management always takes precedence over being a trader.

On all of the accounts I manage, I have 200:1 leverage. Does this mean I can risk more because I have double the leverage of a standard account? Absolutely not, it means I can risk less and get the same reward.

Cisco has stated many times he typically will not have more than 12% of his margin tied up in the market at any one time. I also try to stick to this game plan, but I will be honest and tell you at times I trade more aggressively and will have as much as 15-20% of my margin in the market, however, I do not recommend you take on that level of risk! 

EXAMPLE:

By sticking to the 12% rule, here’s how I would break down a trade using the buy signal… suppose a buy signal was generated and we determine 3 buying levels, and we also know from experience that the average drawdown is 27 pips from the last buy point… 

First buy point: 1.3510 
Margin I use on first entry: 1%

Second buy point: 1.3480
Margin I use on second entry: 2%

Third buy point: 1.3455
Margin I use on third entry: 3%

Additional buy points… suppose there was 20 pips of drawdown from the 1.3455 buy point, I would use the remaining 7% margin I’m willing to risk by buying at the bottom. I may make 1 more trade and use all 6% on that trade, or I may stack two entries and risk 3.5% margin, it all depends on market conditions at that time… 

If I’m in a scalping situation, I will never use more than 3-4% of my margin at any one time. The scalp trades are quick hits on the market that will add up nicely over each weeks’ worth of trading, but I use very little margin to scalp in order to mitigate risk in case the market moves against me. 

Margin Usage Based on Equity…

I do not decide how much margin to risk based on what my account balance is, rather I base it on my equity, because to me, equity is how much money you really have at any one point and time. 

Common Misconception – Account Size/Account Balance…

The size of a trader’s account has absolutely, positively nothing to do with the amount of ROI that trader can return nor does it have anything to do with how much additional margin that trader can safely risk… it’s all PERCENTAGES!

If I have a $2,000 account or a $200,000 and use 40% of my margin on my trades, I am taking on the same amount of risk! Using 40%, 50%, 60%, etc. of margin on any size account is way too risky no matter how big or small the account is. 

Plus, believe it or not, it’s actually harder to make money the bigger your account gets. It would be easier for me to make 100% ROI on a $3,000 account than it will be to make 100% ROI on a $300,000 account. Just from a pure psychological standpoint it’s harder… also, the bigger your account gets the more leverage the broker takes away from you. 

A good many traders think, “yeah if I just had $100,000 of usable margin, I’d have it made, no problems ever…” This kind of thinking is absolutely wrong and not even close to what the reality of trading is.

Not Giving Back…

As Cisco always says, “we are marathon runners, not sprinters…” Yes, some traders have risked upwards of 50% of their account on trades and have had a big pay day in return. That will happen every now and then, but they are also the traders that get margin-called once or twice a month and never really get anywhere…

You hear us repeatedly say “we do not give back” this means we do not give our profits back to the market. Almost anybody can make money trading currencies, that is the easy part, the hard part is actually keeping your profits and maintaining a healthy level of ROI. 

I look at the market as a guerrilla warfare style battle… you have this enemy that is always lurking at you from any direction and at any point will attack you with whatever means necessary to defeat you and take what is rightfully yours. 

I take a defensive stance to trading. Just like in football (American style), a defense can stop the offense from scoring but they can also score. The offense can only score, but can’t stop the other team’s offense from scoring, and the offense can be scored on by a defense that takes advantage of an opportunity to do so… hopefully that will make sense… 

To sum it up, you are a risk manager first and a trader second. Never over-margin yourself in this kill-or-be-killed market. Do not believe the misconception that the more money you have the easier it is to make money. Do not give back to the market… in order for you to “win” at this game, some other trader has to “lose”… because 95% of traders lose money in the market, there is plenty of money for us winners to take!

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Confessions of a CRAP Trader Trade Team Update – – 7/31/08 (Non Farm Payrolls)

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