Thursday, April 23, 2015

Equity Management

Equity management is the most critical discipline in all of trading. Understanding equity management is fairly straight forward, but the application of your equity management parameters, with consistency and discipline is a much greater challenge. It is simple, if you do not employ strict equity management discipline, you will be closing your account with less funds than what you had in your original deposit.
Leverage is very dangerous and it is used by brokerage firms to feed the greed appetite of get-rich-quick mentality traders. Leverage, if used at all, should be applied with prudence and experience under a clear trading plan and disciplined equity management parameters.
-With my managed clients I will typically risk 0.5% to 1.5% of total equity, depending on the trade. We typically trade our Forex Managed Accounts in a range of 0.25:1 to 3:1 gearing. This means that if we have 1M in total equity that our position size will range anywhere from 250K to 3M, depending on the trade variations.
If you are winning on 50% of your trades using disciplined equity management you should be profitable in a moderate to good market environment, but most importantly, you will survive a string of losing trades in a very poor market environment.
If you are a retail trader and you deposit 5K into a trading account and trade 100K lot sizes, it will only be a matter of time before you lose. You must be willing to accept and calculate that you will experience the maximum drawdown at the early stages. You should start your live trading assuming you will take ten consecutive losses. This means the risk should be small, as mentioned above. The problem people have with small risk is that on the opposite side of the trade, their will also be small profits, relative to expectations. Most people want to make large profits fast, but end up taking large losses fast. The nice profit typically results through disciplined trading for an extended period of time when the compounding factor begins to take effect. A good program will see nice compounding effects in about 18 to 24 months of consistent profitable trading.

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