Using Margin for More Positions

Quote from Corso482:



If every trade you take has a good risk/reward ratio, and you have positive expectancy on your side, why wouldn't you take as many positions as possible?
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Because if 70/100 trades according to your strategy will be profitable, and the 30 un-profitable ones came first, then you would be wiped out. That needs to be figured in...

What is the probability of that happening? :)

Balancing out the risk...

Natalie
 
reduce market correlation to 1-2% intraday, use relative strength to both buy and sell at the open/ sell @close. if your holding 100% longs/short, you'll get burnt.
think about it some news breaks, all the bids/offer collapse...

you'll probably back test the system, select how you're going to get the 1-2% correlation
i think:)
 
Quote from KavMan:

Don't trade with money you don't have
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Ok, that's a nice "piece of market wisdom," which I'm sure is true most of the time. But what about using margin in the circumstance I outlined in my first post-- not increasing your risk per trade, but taking more of the same risk. Could you explain your reasoning as to why using margin in this way is still a bad idea?
 
Quote from Corso482:

Gordon Gekko kind of brought this up a while back, but the discussion turned mostly toward day trading....

Concerning swing trading only, if I had 100K account, and wanted to use 10K for each position, with 5% stop loss, that would only leave me with 10 possible positions at once, risking a total of 1/2% of my account per trade. If I use 2:1 margin, and still risk 10K on each position, with a 5% stop loss, that allows me to carry 20 positions at once, while keeping the total risk to 1/2% of my account per trade.

Doesn't this use of margin mitigate most of the "beware of margin" mantras? Because I'm not increasing my risk per trade, I'm simply taking on more of the same risk.

In the above example, using 5% stops on 10K positions in a 100K account, I'd have to be wrong 200 times to blow up. With that kind of room for error, I'd say carrying 20 positions at a time instead of 10 isn't that much riskier. Plus, if you have positive expectancy, the more positions you are able to take the better.

Of course there's the issue of freak gaps. However, those usually happen as a result of company specific news, meaning it's unlikely multiple positions will experience freak gaps at once, blowing up my account. So while having more positions open at once would technically make me more vulnerable to freak gaps, it's unlikely that simultaneous gaps will happen, save a nuclear attack.

Even then, in the event of some freak disaster, if all 20 of my 10K positions in my 100K (leveraged to 200K) account gapped down 50%, I would only be down to zero, with no debt. However, the odds of a portfolio of 20 stocks all gapping down 50% at once is so negligable it's not even worth considering.

So, am I missing some subtle mathematical risk here? Or is taking on more swing positions in the above example using margin a good idea?
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Corso...

What a mind. You do bring up some stuff. Is your goal then to not "blowup" or end up at no worse than -0-, worse case scenario and with "no" debt? ! Interesting thought. "Hey guys I succeeded. Didn't lose my whole margin account!" "Ok You pay for the drinks" "No can do. I didn't make much either! Had too many positions..."!

Diversification leads to mediocre returns, imho. I tried that swing trading and had too many neutralizing experiences. No different than in investing. One seeking to do 'as well as' the broad markets, and/or other fund managers and/or trying to outperform by a 'few' points... can spread their risk.

Manage fewer positions but manage them well... scale in, scale out... more fuel to your (profitable) positions in healthy trending/continuation patterns; and utilize options stategies for leverage therein.

IMHO... concentrate on fewer but higher probability opportunities.

Don't you need some sleep?
 
meant to say you bring up some 'decent' stuff. Probably make a good financial talk show host. Seriously. Consider that after you get some more experience.

Can still trade. :D

iceman:cool:
 
Quote from Corso482:


Ok, that's a nice "piece of market wisdom," which I'm sure is true most of the time. But what about using margin in the circumstance I outlined in my first post-- not increasing your risk per trade, but taking more of the same risk. Could you explain your reasoning as to why using margin in this way is still a bad idea?
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If your system is producing a reliable, steady increase in your equity, then (assuming this steady growth will continue) using margin is a good way to double up the rate of increase.

Conversely, if a trader is still in the "learning" stage, seeing plenty of losing trades along with the winners, and not yet consistently profitable, then use of margin is probably not rational. You'll just break your bank twice as fast, or at least draw down twice as far after a given series of losing trades.
 
Quote from Corso482:



Ok, that's a nice "piece of market wisdom," which I'm sure is true most of the time. But what about using margin in the circumstance I outlined in my first post-- not increasing your risk per trade, but taking more of the same risk. Could you explain your reasoning as to why using margin in this way is still a bad idea?
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Expound on taking more of the "same" risk?! An example?
 
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