Can you help me with this?
1. Why is it smart for obvious reasons? Its not obvious to me.
2. How is leverage even used? If youre trading position size based on percentage of your account how is it good or bad?
To me it is a confusing term. If youre in for 2% or greater than your account size, then lets not beat about the bush - its not called 'leverage' its called 'stupid'. Im sure there are many people that regularly go more than that but IDGAF what others do, my only interest is not going too deep into drawdown when its my turn to take a string of losses.
"They have an edge and wish to magnify it, and yes, they must manage their risk."
Edge x volume is a key factor.
If a trader has a 30 000 account, as soon as they put more than 30, 000 in play they are on leverage. This is important to what I am saying.
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In the beginning, learning but no edge, perhaps:
Simulator, then,
100 shares/ minimum positions.
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Profitable trader, example situations:
Opening order traders, like Lescor, put over a million worth of orders out but not get filled on most.
Pair and deal/arb traders often put on numerous positions.
Position traders might put on multiple positions.
I do not know true scalpers any more (not saying there are not any), but to make things worth their time they may need larger size than their account.
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Let's say someone traded only one position at a time and earned a penny a share; two pennies round trip. Say they have 30, 000 in their account and they buy 1000 shares of a 30 dollar stock.
Their expected "earn" would be only 20 dollars. On individual trades they may make more or less.
Well.. if this trader could make lots and lots of these $20-earn trades they would do well with no margin.
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A person with very small money who wishes to make decent money must use leverage. A person with a lot of money may feel they do not want to tie up a large sum in a daytrading account.
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If someone wants to tell me they make a huge amount per share traded (they have very special methods, perhaps) then of course no leverage is needed.
Or if they can do many, many short trades they can grow with no leverage.
Summary:
If a winning trader wants to meaningfully grow their account with no leverage they must either
1 Have a huge edge (how hard is this?)
2 Do lots of volume on a smaller edge
3 Give up enormous amounts of time working for small amounts and save.
(#3 is not possible if one lives out of their account and is not optimal if one has a worthwhile edge)
4 Accept a risk of ruin higher than many would think.
Or.... a combination of the above.
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Side Note:
There are rare times it is ok for an experienced winning trader to risk blowing out a small account because of the value of his time.
Examples: He has other ways to make meaningful money or has a large income.
(This mnd set can be dangerous and is often a front for crazy gambling)
