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I agree with you here, b, but then I also buy stocks for cash
(unleveraged) and don't trade futures. :)
Bill
--- In amibroker@xxxx, "b519b" <b519b@xxxx> wrote:
> William,
>
> Thank you for your response. I value it since you have experience
> trading futures and I do not. My responses are given below.
>
> --- In amibroker@xxxx, William Wong <williamwongab@xxxx> wrote:
>
> WILLIAM: > a. the author seems to say that a drawdown of 50%
trading
> stocks and 50% trading futures have different meaning. It seems to
> suggest that a paper loss of 50% on share value is not "real" loss
> as you are still holding on to the shares versus futures will be
> real loss. I think this is falling into trap of turning a trading
> position to an "investment" position in the hope that price will
> recover.
>
> RESPONSE: The point I was trying to make is this. Leveraged traders
> are at greater risk in situations when stops fail to protect (gap
> downs, or a series of limit down days for futures). A 50% gap down
> in a stock is a 50% loss for the non-leveraged trader, but it is a
> 100% loss for a trader margined to the full.
>
> It seems to me that traders who use leverage must, if they are to
be
> able to survive the once in 100 years flood, have money management
> rules that are more "restrictive" than would be necessary for non
> leveraged traders.
>
> For example, 2% is often cited as the maximum one should risk on a
> single trade. For a non-leveraged trader, there is always the
> prospect of a gap down or other event that prevents his stop loss
> order from keeping the loss to just 2%. How much could he loose? He
> could loose 100% if the stock dropped to zero, but that is very
> unlikely. However, gaps of 30%, 50% or 75% do happen from time to
> time. So for this illustration I will use 50% gap down. The non
> leveraged trader thus could loose 50%. What about the leveraged
> trader? In the same situation his loss would be 100%, assuming a
> leverage of 2:1. Now one could argue that neither trader would be
so
> foolish as to put everything into one stock. Fine. Lets say they
put
> money into 10 stocks, and a terrorist act shakes the market. Then
> all 10 might gap down 50%.
>
> It just seems to me that the leveraged trader is more at risk than
> the non leveraged trader if stop losses fail to keep losses within
> the range the trading system expects. For this reason I suspect --
> just a guess on my part -- that the money management guidelines of
> 2% are "conservative" -- with just the right amount of protection
> for leveraged traders and a bit more protection than necessary for
> non leveraged traders.
>
> Now I take another step of logic (which could be wrong) and I
assume
> that since futures are much more highly leveraged than stocks on
> margin, the money management rules for futures should be "very
> conservative" and thus be considerably more protective than
> necessary for non leveraged stock traders.
>
> When all goes as planned (stops work without fail, etc.), then I
can
> seen how the leveraged and non leveraged trader could use the same
> risk rules of say, only risking 5%/trade. But since the risk is far
> greater for the leveraged trader if the stops fail, the rule of
> thumb is set not at 5%, but at 2%. Just to be clear -- the 5%
> figure is just used for illustrating the point. I am not saying it
> is a right amount for non-leveraged trading.
>
> >
> WILLIAM: > I have traded both stocks and futures for many years. I
> find no difference in the way MM should be applied. You can
> practice strict MM to both stocks and futures irregardless whether
> you are margined or not. The same strategy applies. There are
> countless literatures on MM and they don't differentiate whether it
> is stocks or futures, margin or not margin.
>
> RESPONSE: If the literature does not different between the
> additional risk carried by leveraged traders when stops fall and
the
> lesser risk of non leveraged traders in similar situations, then it
> would seem that the literature is wrong. Or am I overlooking
> something?
>
> b
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