- Critical to trade on low leverage
- Leverage is a luxury that should be used wisely
- Always give yourself room to build into a position
THE RIGHT WAY - One of the most important lessons as a currency trader is learning how to use leverage when trading in a market that affords excessively high leverage. As a contrarian, leverage can be an important resource for my trading, but it is a luxury I do not take for granted. For the most part, I will establish a position with little to no leverage, with the expectation that I will have a decent profitable trade as it moves in my favor, or have the opportunity to build into a small leveraged position that translates into attractive and compelling upside potential, with still very reasonable downside risk. But if you start a position with a good deal of leverage and then look to employ additional leverage as the position moves against you, this will not work and could have devastating consequences. Brokerages will afford traders as much as 200:1 leverage, yet when I build into a leveraged position, it will rarely exceed 10:1.
A SERIOUS DISTINCTION - Another important point I want to highlight about my strategy is the difference between what I do and averaging into a losing position. It may seem like I am averaging into a losing position when I build into a trade, yet this is not what I am doing. Averaging into a losing position means you consider your position to have not worked out when it moves against you, yet you stubbornly average into it with the hope that it turns around. When I average into my position, I am not doing so with the 'hope' that it returns in my favor, but am doing so as an opportunity to build into a position that I have provisioned for in the first place. As my strategy goes, I am always much lighter than my full position size when I initially enter a position. So I am always thinking and even hoping in many ways, that I will get the opportunity to build into the position.
THE INTERVIEW - With that said, I was able to book some profit on my USDCAD short on Wednesday and am no sitting on a short position on the remaining portion from a very attractive and in the money level of 1.3970. Heading into Christmas, I have 4 positions open, and all are looking good. Three of the four are in the money, with USDCAD, AUDNZD and the SPX500 showing profit, while GOLD is the only one sitting out of the money, but at the same time, has the potential to be the most exciting and rewarding in the weeks ahead. I did an interview earlier this year about my trading methodology and approach to markets, and if you haven't had a chance to listen in, I would invite you to do so. I was able to get a lot across in the interview and I think it can help as you think about your goals for 2016. HAPPY HOLIDAYS TO YOU AND YOURS!!