Can someone explain the secured prop leverage vs risk issue?

I

Indie Cator

If I have understood correctly firms like Echotrade, Green Tree etc are 'secured' prop firms. You get leverage but any losses come out of your own capital? Is that right?

Can someone explain then why one would want to trade with leverage which is out of whack with what one can afford to risk? Surely if you trade with leverage and have a drawdown then your own risk capital is going to get wiped pretty fast? Am I missing something?

Are there any real prop futures firms (trading only the firms capital)?

Thanks

Indie
 
Quote from Indie Cator:

If I have understood correctly firms like Echotrade, Green Tree etc are 'secured' prop firms. You get leverage but any losses come out of your own capital? Is that right?
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Yes


Can someone explain then why one would want to trade with leverage which is out of whack with what one can afford to risk? Surely if you trade with leverage and have a drawdown then your own risk capital is going to get wiped pretty fast? Am I missing something?
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It depends totally on how you trade, and you might tend to trade differently with a lot of leverage.

Say you have $10k in capital that you're trading now and using your 4-1 leverage to trade a 1000 share position of a $40 stock. You risk 200 dollars if you're wrong, or 2% of your capital. It's a set up that you know well and has a positive expectancy.

Now if you were at a prop firm that gave you 20-1 leverage and you saw the same setup, would you trade 5000 shares in the same situation? Unless you are a gambler or a dunce with no understanding of risk, then no. But if you had your 1000 shares on and are waiting for things to work out and saw the same setup in another stock, you could trade it too. And why wouldn't you want to? It's a positive expectancy system, you want to put your capital to work as often as you can when you have the odds in your favor. You don't have to wait for each trade to develop and complete before entering the next one. You can take more high-odds shots and make more money.

Another example- You have an arbitrage situation that allows you to earn a risk-free 10 cents between two $50 stocks. With your $40,000 of retail leverage you can take down 400 shares ($50x400x2) and make 40 bucks. With the bigger leverage you would make 200.

Those are just two examples that come to my mind because those are ways that I trade and greatly amplify the capital that I have. I still keep the dollar risk in-line with what I can handle, but I can put my money to work much more often and make a good living off a relatively small account.
 
Quote from Indie Cator:

If I have understood correctly firms like Echotrade, Green Tree etc are 'secured' prop firms. You get leverage but any losses come out of your own capital? Is that right?

Can someone explain then why one would want to trade with leverage which is out of whack with what one can afford to risk? Surely if you trade with leverage and have a drawdown then your own risk capital is going to get wiped pretty fast? Am I missing something?

Are there any real prop futures firms (trading only the firms capital)?

Thanks

Indie
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You may not be "missing" anything, but perhaps unaware of one of the benefits of trading with a professional firms. At BT, for example, our traders may utilize (read: "use" not "abuse") a $million or more simply by entering 30 "opening only" orders (30 buys, 30 sells of 2000 shares each = 60,000 shares x $40 = $2.4 Million in orders prior to the opening.

Of course, in the above example, the whole $2.4 mil is not at risk, since you cannot be filled on both the buy and the sell orders, and you generally get filled on only 20% or so of the orders anyway. But this strategy alone can help you make a lot of money by "using" capital ....for free (in our case).

The other benefit is as similar to what the prior poster pointed out. Imagine you are an excellent Blackjack card counter, with a consistent "edge"....and yet you can only afford to bet $1 chips.....well, wouldn't it be nice to gradually move up to $5, $25, and finally to $100 chips, and keep all the profits involved....while still only risking your original capital ?? Makes sense on the trading floors (where we started in the 1970's) and we simply carried it to traders everywhere. Very few even understand, or are aware, of the entire benefits involved.

(BT ad coming)...fell free to call me directly to discuss.

Don 800.249.7488 Listen to our radio show : 12PM Pacific time from the website below!
 
Quote from Don Bright:


Imagine you are an excellent Blackjack card counter, with a consistent "edge"....and yet you can only afford to bet $1 chips.....well, wouldn't it be nice to gradually move up to $5, $25, and finally to $100 chips, and keep all the profits involved....while still only risking your original capital ??
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The only problem is that once you're trading at the $100 chip table, one loss can wipe out your entire capital contribution, since the money you put up is not in proportion to your increased leverage. Keep that in mind!
 
I knew the opening orders would have to get pumped here. It's the one thing that prop firm leverage is really good for.

Although, I do understand lescor's point of view. You should probably be decreasing the risk on each subsequant position you add though, because otherwise it would really hurt to get hit with a "streak" of losers that happen simultaneously. I still think though, that 4:1 is enough for the majority of purposes, but maybe I'm wrong.
 
There are many ways to use leverage. The big one that comes to mind is arbitrage. That's where you want to use much larger positions as your risk in a lot of arbitrage is very low.

Running multiple systems at once that are not correlated

Running automated systems that use a lot of orders that have a high probability of making money but low probability of getting filled (lots of orders taking up a lot of capital in the process)

Those come to mind.
 
Using a lot of leverage for arbitrage can be dangerous. First, if it is a true arb position where the two sides are exchangable for each other then there is little capital requirement. If it is a risk arbitrage position (i.e. takeovers, etc.) then you have a lot more risk than you are perceiving especially with your leverage. If your money is in a prop firm that does a lot of arbitrage or pairs trading watch out because those traders will take a hit one day. If the firm has alot of money in ahead of the traders like Bright claims, then you are less at risk.
 
Have to chime in. Stock_lover is right.

There are correlated arbs that require a large capital investment. Each leg must be margined seperately. As long as you don't hold the thing too long, and pay high loan fees, you benefit from prop leverage.

I should know, I don't trade prop, but I do trade those kind of arbs. My acct is not small, but there are times where 20-1 would be quite usefull.
 
Quote from stock777:

Have to chime in. Stock_lover is right.

There are correlated arbs that require a large capital investment. Each leg must be margined seperately. As long as you don't hold the thing too long, and pay high loan fees, you benefit from prop leverage.

I should know, I don't trade prop, but I do trade those kind of arbs. My acct is not small, but there are times where 20-1 would be quite usefull.
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both sides are right.

Arbitrage isn't without risk and leverage is a double edged sword. Can work heavily in your favor or against you heavily.A firm that has a lot of money as a wall of protection though isn't more safe if positions in the firm are allowed to go beyond the risk levels that the firm could afford to lose.


:D
 
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