The question “How should the size of your leverage influence the size of your trades?” was recently asked.
Leverage and margin is something that can really get the head of a new trader spinning. The easiest thing to do is to take it out of the equation in your position size decision-making process other than to determine how large a trade you can put on. Maximum trade size available is really the only thing leverage means to you. Aside from that, it doesn’t matter at all.
When you decide on trade size it should come completely from your risk plan. You should know what your permissible risk is. You have an idea of what your risk is on a given trade. You adjust your trade size to make the two match. If the trade risk exceeds your guidelines, you don’t take the trade. If it’s not, you take the size position your parameters allow, up to the maximum size your leverage will permit.
That’s it. Real simple.
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About the Author
John Forman, author of this blog, has traded for more than 20 years, is a professional market analyst, and authored The Essentials of Trading. He is an active participant in trading forums, consults for trading related businesses, as published literally dozens of trading articles, and has been quoted in a number of books and in the media.
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