MagnusTradingGroup

LEVERAGE: The Legitimate Usage

BITSTAMP:BTCUSD   Bitcoin / Dollar
Imagine you have a strategy and you found that the optimal risk you should take is 4%.
In other words with this strategy you should put 4% of your capital at risk in every trade to grow your account the fastest.
If you enter a trade with 100% of your capital, the SL % is the % you put at risk. NOT the whole position size. So by entering a trade with all of your money and setting a 4% SL you only put 4% of your money at risk at all times !

Now let's examine the following situation keeping our strategy in mind.
Imagine a perfectly oscillating market (for demonstration only). We are at the point where the red line ends and we expect the price to go the dashed path with a very high certainty. Our optimal & desired risk is 4%. However in this trade that we want to enter rightnow we can set a stop loss tighter than 4% because we are very certain that it wont be hit. So we can use a 2% stop instead. If you now put 100% of your capital in this trade you only put 2% of our money at risk at all times. However we want to put 4% of our money at risk for the best returns possible taking optimal risk (4%). That's where leverage comes into play as a LEGITIMATE tool and not a gambling tool. You already have 100% of your money in this trade, you can't put in more (without leverage) although your risk management tells you to do so. You want to increase your risk from currently 2% to 4% = double it. This means you have to take a 2x leverage. Now you are 200% invested in the trade and if your stop loss of 2% (in price action) gets hit you will lose 2 x 2% = 4% which is the optimal risk we wanted.

More in-depth information about optimal risk for fast growth:
http://en.wikipedia.org/wiki/Kelly_criterion
https://www.youtube.com/watch?v=iykpeZtoNIk
khoilevt
2 years ago
do you think we should use 2x futures Instead spot ?
+1 Reply
MagnusTradingGroup PRO khoilevt
2 years ago
You should better leave your hands off leverage until you understand the concept outlined in the text above :)
Reply
khoilevt MagnusTradingGroup
2 years ago
sorry , i'm english is not well :)
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khoilevt khoilevt
2 years ago
i'm using leverage 20x ....
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LeMogwai
2 years ago
This explanation could not have been better !
We should make the mofo using x50 leverage on bitcoin learn that by heart !
Reply
aziz92
2 years ago
It's very simple.

Risk = x% of Account Size
Position Size = Risk/StopLoss
Leverage = Position Size / Account Size

Your Example illustrates it well but thought I should point this out too.
Reply
aziz92 aziz92
2 years ago
So the only variables here are RISK and STOP LOSS. As a trader, those are the only thing you should be looking at when determining your position size. Not how much $ you are going to make, etc.
+2 Reply
MagnusTradingGroup PRO aziz92
2 years ago
Thank you very much !
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HerSerenity
2 years ago
Good illustration of the correlation between risk management and leverage, though I thought Kelly was about diversification, thus not too relevant for the BTC-only trader?
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MagnusTradingGroup PRO HerSerenity
2 years ago
Kelly tells you your "reasonable risk" which was assummed to be 4% in the example above. read the wiki, it's cool (to the point where it goes full retard math)
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licence2kill
2 years ago
i totally understand, thanks for the info by the way
+1 Reply
MagnusTradingGroup PRO licence2kill
2 years ago
Thanks for Your feedback :)
Reply
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