Edition 309 May 7, 2010
Edition 309 May 7, 2010 |
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Trading Article by Joe Ross©
by Joe Ross.
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strictly LEVERAGE Leverage is why trading futures and forex is considered to be so much harder than is trading stocks or mutual funds. Leverage is what makes trading futures and forex a couple of the most exhilarating and emotional experiences you'll ever have. Leverage makes you feel invincible after a series of winning trades, and like an idiot after a series of gut-wrenching losses. Leverage can be a joy or a horror! Leverage is the use of credit to enhance your speculative ability, and is one of the principal attributes that makes futures and forex trading so appealing to many traders. Managing leverage is an important aspect of trading. By controlling the amount of leverage, you are in essence adjusting your level of exposure to the market as a stated percentage of your account balance. This enables you to control price-swing consequences as they relate to your account balance. The more control you have in your trading, the better. With futures trading, the leverage is generally more or less 95 percent. This means that with as little as five percent of a futures contract’s value, you can have exposure to the underlying commodity, with full responsibility of the price swing. You can buy one gold futures contract with the required margin of approximately $5,700, and have exposure to 100 troy ounces, which at $1,100 an ounce is market exposure to some $110,000 worth of gold. Each one-dollar move up or down is worth $100 profit or loss. With forex, the leverage is even greater than with futures. In forex trading, $1,000 can control $100,000. Leverage is a two-edged sword, and employing the power of leverage requires responsibility and knowledge. Take away some of the leverage, and you take away some of the risk. Leverage can expose both your good and bad qualities. If you have weaknesses, leverage will exploit them quickly. If you have strengths, leverage can reward you at first. However, watch out! Leverage will then attempt to turn your strength into a weakness by leading you into a state of complacency. Leverage can make what is routine, difficult; and what is difficult, nearly impossible. Leverage manifests as the definitive extreme between greed and fear, and places you right in the middle. Move a centimeter off center and you may be in trouble. Allow any emotion to enter into your trading, and you run the risk of taking good trades and turning them into losers. Get overconfident after a few winners, and you may watch a great winner turn into a margin call. So how's an average trader with a $10,000 or less account expected to manage the ogre that leverage can be? It’s pretty simple - lessen the leverage manually. You can reduce your exposure simply by cutting your position in half. Alternatively, you can use mini contracts, spreads, and options, when appropriate. In any case, you must take personal responsibility for managing your risk by controlling your leverage exposure. Trading sometimes feels like you’re riding a roller coaster. However, if you internalize the message here, you can select the track and control the speed. Remember, adjustments to leverage will affect the percentage of gains or losses relative to your account balance. One tool you can use to manage leverage is to keep the risk small. What does this mean? If you’re a position trader, you should keep your risk per trade under four percent of your account balance. For example, a $20,000 account should keep risk per trade to $800. This will give you critical staying power and protect your account should a broad consolidation phase occur, which could last for months. Match your risk per trade with your method. If your trading method is regularly successful (more than 50 percent of the time) you can probably risk between two and four percent per trade. If your success rate is below 50 percent, you should probably gravitate towards two percent per trade. Your exit strategy should be based on your trading method, and remain disciplined. If your method requires a large profit/loss ratio, then by all means you must use the longer-term exit. If your method thrives by winning on a higher percentage of trades, then take profits at short-term targets. Understanding what type of method you’re trading is a key factor in your trading. As a general rule of thumb, long-term trend followers seek profit/loss ratios of greater than 3 to 1. Short-term swing traders often look for a ratio nearer to 1.50 to 1. Scalpers using methods that have a very high percentage of winners may be happy with 1 to 2 as a ratio. We teach traders how to do this at our seminars and in private tutoring. One of the most important concepts for trading with leverage is staying power. Many people believe that the larger your account, the more staying power you have. But the concept of staying power goes way beyond the size of your account. Here's why. Every trading method requires a certain risk amount. Most good ones keep you in a position until either your profit objective has been reached, or your stop loss level has been realized. They do not allow you to inject emotion into your trading. If you short-circuit the method, for example by using a closer stop, you might as well wave goodbye to any chances of making money. A dilemma occurs when the amount you are risking on any one trade exceeds your predefined risk tolerance level. What are you to do? Do you pass on the trade because it falls outside your predefined risk level? Standing aside is certainly one option. However, rather than passing on the trade or modifying your predefined risk level, you might consider cutting down on your leverage. If you normally trade two contracts, trade one. If you normally trade one, consider a mini contract, an option strategy, or maybe a highly correlated intra-market spread. Any of these solutions can allow you to maintain your predefined risk parameters and still participate in the trade by increasing your staying power. Understanding the relationship between leverage and staying power is essential to managing risk. Understand it, and you’ll understand the leverage game.
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Joe Ross is the discoverer of the Ross hook™, and has set new standards for low-risk trading with his concepts of "The Law of Charts™ " and the "Traders Trick Entry™." Joe was a private trader and investor for much of his life, but a serious health situation in the late 80's caused him to shift his focus, and that is when he decided to share his knowledge. After his recovery, he founded Trading Educators in 1988, to teach aspiring traders how to make profits using his trading approach.
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Joe Ross, the CEO of Trading Educators Inc., holds a Bachelor of Science degree in Business Administration from the University of California at Los Angeles. He did his Masters work in Computer Sciences at the George Washington University extension in Norfolk, Virginia. He is listed in "Who's Who in America." After 5 decades of trading and investing, Joe Ross still tutors, teaches, writes, and trades regularly. Joe is the primary author and Editor-in-Chief of the company's newsletters: Chart Scan™, Spread Scan™, Options Scan™, and Traders Notebook™. He is the host of the free Traders Live Chat, the free European Chat for Traders, and the moderator of his popular trading forum.
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Be more consistently profitable in the
E-mini S&P 500
We know that many Traders have been looking for a smarter and better way to be more consistently profitable in the E-mini S&P 500 market, and we are happy to let you know that through Joe's "Day Trading the E-mini S&P 500" e-book, they have finally found what they were looking for.
We are really excited to know how much our clients have profited from Joe's
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“I have all of Joe's books - logical, accurate trading methodologies, and the E-Mini S&P 500
e-book is another successful extension of Joe's honesty and legacy in helping traders. Thank You Sir. I have successfully used Joe's trading methods in the past.” -- Tim A., U.S.A.
"Full Advise with great emphasis on market dynamics, an essential ingredient to trading success.”
-- J. Torrelles, Spain
“Joe, your e-book "Day Trading the E-mini S&P" was just as expected. Fantastic! Your book has given me a better understanding of what the markets are doing throughout the day and why. Thank you for all that you do." -- Shane K., USA
“This is a fascinating book which explains why the E-mini S&P 500 moves the way it does and how to profit from that knowledge.” -- Thomas C., U.S.A.
“There is a wealth of wisdom and knowledge packed in this E-mini S&P 500 e-book. What is especially outstanding is the abundance of chart illustrations taking the trader through the day trading technique. Joe's years of experience permeate the method from start to finish. Both the experienced and new trader will benefit from the approach to trading the e-mini S&P. I'm most grateful for his sharing what has taken him a lifetime to achieve.” -- Billy A., U.S.A.
"I am very grateful that I purchased Mr. Ross's book on day trading. It was an eye opener to me in how to look at the daily action in the S&P e-mini contract. I position trade and this will give me a better way to enter and add to my positions for my system. In the past I was taking too much risk by entering a position at the end of the day where if I could have entered earlier there would have been better money management. Thank you for a great way to look at day trading." -- Patrick Bayes, USA
“Joe is one of the best traders willing to share his vast experiences with the public. His deep understanding of the reasons for the markets moves, his intuition, compressed into the not so many pages, richly illustrated with numerous real-life charts, his logical reasoning, all make this book into a treasure. As an Academician A.N. Kilmogorov once said, the more compressed the info, the more value per character it contains....And of course this value per character is readily applicable to the other markets (like oil markets for example that I trade). Thanks Joe!.” -- Victor R., U.S.A.
“I thoroughly enjoyed the book and finished it within the first few days of purchase. The information about the insider was an eye opener." -- C. Croeser, South Africa
You'll find more trader testimonials on the webpage that introduces the "Day Trading the E-mini S&P 500" e-book - just follow this link. THANKS AGAIN for sharing your thoughts and comments; we appreciate them immensely.
Grow Your Capital through Trading Currencies
Everyone knows that currency trading can be a great way to protect and grow your capital if you know which currency to be in, and when to be in it – and that is what Forex at the Market (Forex ATM) is all about.
Forex at the Market is a trading advisory for traders who have gone through enough forex scams to know that it’s impossible to consistently make 100% or more in their account each week and each month. Forex ATM is for traders who seek consistent profits, but who no longer feel they have to trade every day or trade all day long.
If you have a job during the day, you can still benefit from
Forex at the Market.
In Forex ATM you will find premium,
class-A trades only — the ones that
make you money.
Forex ATM is exciting because the trades offered can be taken no matter the size of your account, since you are able to nicely scale the size of your trades with most Forex brokers. Therefore, the method is good for traders with any size account!
VISIT OUR SITE
WWW.FX-ATM.COM
TO FIND OUT MORE ABOUT "FOREX AT THE MARKET"
Learn how to manage
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profitably
80% of traders are on the right side of the market when they enter a trade; yet overall, 90% of them lose money in the markets.
Why?
Because no one shows them how to profitably manage what takes place after they get in!
You will find a ton of books out there, all talking about magic indicators and about how to enter the market, but what are you supposed to do once you get in?
They rattle on about money management, telling you that all you have to do is keep losses small and let your profits run, but by now you know it isn't all that easy. Just exactly how do you keep losses small and let your profits run?
At Trading Educators we talk about money management too, but we also talk about self-management, trade management, risk management, and business management.
Truthfully, without personal management and self-control, money management just won't cut it.
Here's what I (Joe Ross) offer you, and what you'll gain:
in my trading manual Trading Is a Business, I show you how to consistently make money trading, by showing you how to properly manage your trades and yourself. That's not all.
Trading will become much easier, more pleasant, and more relaxed. Why? Because you will understand the markets and what is really going on.
Follow this link to my website and let me give you at least 3 valid reasons I can back up what I claim!
"Hi Joe,
I can't say enough thanks. I just finished reading your whole book "Trading Is a Business" including the appendices. I'm so glad you included them too. What a gift you given us and challenge.
Your book is doing such a wonderful job of challenging and encouraging me to be the best I can be. Do the work and love the process. Truly for me, trading is the best business in the whole world for me now.
All my best, Richard"
(Testimonial for Joe Ross' trading book Trading Is a Business)
Visit Joe Ross' Online Blog "Trading for a Living"
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