Why you should trade risky securities conservatively

Make sure you're not overleveraged

leverage is dangerous

What do you do when you have all your capital committed, but you get a NEW trade signal before you get stopped for a loss or take a winner to free up some buyer power?

This can happen when you have a smaller account. It can also happen if you have a larger account, but have a maximum amount of the account that you commit to margin. 

If you have a smaller account, my recommendation is to sell the biggest loser to free up the cash / buying power. This is done before your protective sell stop is hit.

In my experience, trades that have made me money did so from the ‘get go’ so that’s why I puke out the biggest loser at that time. I believe that you’ll be better served by taking the new trade that has momentum behind it. 

If you have a larger account with a “target margin percentage” based upon the total assets under management, you can set a circuit breaker to make a rule around this occurrence.

For example, you might have a rule that allows you to commit as much as 15% of your capital to margin in your futures trading account. That means $150,000 for every $1,000,000 under management. 

Do you allow it to go to $200,000 intraday? Do you offset the biggest losers or oldest positions that do not have unrealized gains in order to free up the margin?

Look at your backtest and see how many of those losing trades came back to be winners. In my experience, only a small percentage will (at least based upon how I trade). 

Many of these new trade signals will be for additional risk units to existing winning trades in your portfolio if you have this as part of your system, that’s why this rule is important. 

It’s not uncommon for me to have initiated 4-5 trades (in different names), only to have 1-2 knocked out for losses, 1-2 be flat, and 1-2 show modest gains. Once in a while, one position will run like the wind. [Sometimes, I get knocked out for losses across the board – fun times…]

Conclusion

If I get a signal to add to the winner, the margin has to come from somewhere if I have not gotten stopped or taken a gain from a system generated order. If you decide to wing it, and go home with 20-25% margin/equity ratio, you may get away with it, but you might take a big hit too. IMHO, you job is to enter orders and then play superior defense. This rule will help you avoid having regrets.

P.S. I’ll leave you with this idea: after you’ve gotten 10 years of trading experience and have developed a great feel for the markets, you might be in a better place to endure greater risk for a few days. The point is everyone is impacted by black swans regardless of trading experience and assets under management. Better to play it safe, especially while trading a riskier asset class.

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