Trading Basics: Evolution of a Trader

LEVERAGE GUIDELINES CHECKLIST

If the tales of massive losses has not persuaded you to avoid leverage, then let us discuss guidelines. If you have been trading the markets for less than five years, then forget about using leverage. You are too wet behind the ears for such a risky endeavor.

Look at your trading results. Count the number of trades that had losses of 25 percent or more over the past three years. I understand that sometimes huge losses occur, losses that are unavoidable, but leverage only makes them worse. If you have more than three (one a year), that is too many.

If you have more than three in the past year, then you are either very unlucky or do not know how to place stops. If you are going to use leverage, you need to place stops to limit losses. Nancy used a stop loss, which forced an exit, and she still blew out her account.

Look at the amount of loss you suffered on every trade over the past year and multiply each one by the leverage you plan to use. If you want to use only 10 to 1 leverage, then multiply each loss by 10. Total the losses and see how they would affect your account.

If none of this has persuaded you to limit use of leverage, then email me your story when you blow out your account. Your anecdote will be a cautionary tale for others.

Many of the horror stories in Swing and Day Trading describe traders zeroing their accounts using options or warrants. Try taking a different path and do not use leverage.

Do not use leverage if you have less than ...