Help with figuring out risk per trade using leverage

[Sapperstien 74]

Hey there, 

Say I have a $5000 starting account balance. At 1% risk per trade that $50 risk on each trade. I download the infographic which is taped to my desk. I'm with IBKR in Canada which gives me 3.33x leverage. Okay cool, that means on a $0.25 stop loss I can take 200 shares. How do I work my leverage into that now. Since my Risk per share is capped at $50 do I multiply that by 3.33x to get a risk per share of ~$165  (at $5000 X 3.33= $14000) and thusly ~600 shares? 

 

Or do I only get to take more shares (~600) but not increase my risk per trade ($50) at $0.25? 

 

Kinda having a hard time wrapping my head around this one? 

[RTrader 20]

You should look at the leverage as only a way to trade more expensive stocks, and to short. It also allows you to open more than one position of 5,000 (your cash balance) at one time. Your risk should always be based on your cash balance, or even better... what you personally can handle losing on a trade, or in a day as long as it's < 1%!

 

Jason

[Sapperstien 74]

2 hours ago, RTrader said:

You should look at the leverage as only a way to trade more expensive stocks, and to short. It also allows you to open more than one position of 5,000 (your cash balance) at one time. Your risk should always be based on your cash balance, or even better... what you personally can handle losing on a trade, or in a day as long as it's < 1%!

 

Jason

Thanks for the reply. So it isn't typically advised to use leverage to increase acct size? Why would I need it to short? 

[Aiman 86]

Hi! So first of all, with 5000$ if we go by the books you’re allowed to risk 1% of your account per trade which equals 50$ right? Now, by the books again, you can’t lose more than 2% of your account per day, and again, if you lose 6% of your account per month you must go to simulator for the rest of the month right? As day traders, we need to take more than one trade as it’s tough to get your winner from the very first trade, sometimes you need to make 3/4 trades. Imagine losing 2 in a row, now you’re down100$ which is 2% of your account, if you take 3 and lose two days in a row then you’re down 6%. So in my opinion, this isn’t the best rule for day trading, maybe good enough for swing trading or investing, but not day trading. don’t forget about the part where you can risk less than 1% per trade, it doesn’t need to be 1 every time, especially for beginners, I personally was risking 0.1% of my 25k account when started

Eventually, despite the account size, I prefer going by this rule:

Risk as much as you want as long as you won’t feel emotional after giving it to the market

Some people have 25k account but they spent years and years saving it, 1% might be their weekly salary, and giving it per trade will make them really nervous, and vise versa

now regarding the leverage. If you’ve 5000$ account and you’re willing to risk 1%, then it’s always 1% of your cash account not the leverage. So your risk is 50$. Let’s say you’re trading 2$ stock with 10 cents risk, you can take up to 500 shares which equals buying power of 1000$. You don’t need leverage in this case. Let’s say you want to trade tsla with 1$  risk per trade, you need around 50 shares *250=12500$. Here you’d need to use some leverage, but your risk is still the same. So basically, leverage shouldn’t be used to increase your risk or shares only because you have it. It should be used widely to help you respect the trade management rules you’ve 

[Brendon 146]

If you're starting out, decrease that 1% risk per trade to 0.5% risk or 0.25%, 1% is usually what experienced traders work with because they have a large enough account, well over 25k and have the buying power to keep trading after red days. But since you mentioned your acct is around 5k and most new traders start with a small account. That 1% rule may not be the best option for your account size due to buying power risk (not being able to make trades with more expensive stocks). 

[Sapperstien 74]

16 hours ago, Aiman Almansoori said:

Hi! So first of all, with 5000$ if we go by the books you’re allowed to risk 1% of your account per trade which equals 50$ right? Now, by the books again, you can’t lose more than 2% of your account per day, and again, if you lose 6% of your account per month you must go to simulator for the rest of the month right? As day traders, we need to take more than one trade as it’s tough to get your winner from the very first trade, sometimes you need to make 3/4 trades. Imagine losing 2 in a row, now you’re down100$ which is 2% of your account, if you take 3 and lose two days in a row then you’re down 6%. So in my opinion, this isn’t the best rule for day trading, maybe good enough for swing trading or investing, but not day trading. don’t forget about the part where you can risk less than 1% per trade, it doesn’t need to be 1 every time, especially for beginners, I personally was risking 0.1% of my 25k account when started

Eventually, despite the account size, I prefer going by this rule:

Risk as much as you want as long as you won’t feel emotional after giving it to the market

Some people have 25k account but they spent years and years saving it, 1% might be their weekly salary, and giving it per trade will make them really nervous, and vise versa

now regarding the leverage. If you’ve 5000$ account and you’re willing to risk 1%, then it’s always 1% of your cash account not the leverage. So your risk is 50$. Let’s say you’re trading 2$ stock with 10 cents risk, you can take up to 500 shares which equals buying power of 1000$. You don’t need leverage in this case. Let’s say you want to trade tsla with 1$  risk per trade, you need around 50 shares *250=12500$. Here you’d need to use some leverage, but your risk is still the same. So basically, leverage shouldn’t be used to increase your risk or shares only because you have it. It should be used widely to help you respect the trade management rules you’ve 

Thanks big guy. Its the simple stuff like this that went right over my head in trading 101. I guess it comes from my trading perspective from another trading group that is always on max risk. Would say the name and you'd know who it is but dont know if that group's a swear word around here... 

I will greatly reduce risk/trade so that like you say I can feel comfortable with it if I lose it. 

Okay, that's kinda what I'm after. Like The info-graphic with the risk per trade based on stop loss distance doesn't take the price of the stock into account. So a $0.10 SL on a $250 stock is severely different than a $0.10 SL on a $2 stock. If I have to decided in real time on how far I want my SL to be from my entry then I have to check the infographic. 

That means that I still have to know how many share I can take for that stocks price per share and Im wondering how you guys do that in real time. I did the math for a $0.10 SL and a $1 SL on both a $2 stock and a $250 stock. The numbers work out to needing a $1000,$100,$125000,$12500 account respectively. Since the $125000 is clearly impossible I would have to decide my max amount of share for that stock price before I decide the risk per trade. Does that make sense? 

Im basically trying to figure out which comes first. The risk per trade calc or the account size calc. And how to do it quickly. 

Im thinking for now I just do the risk per trade calc and not trade stock more than like $50. 

IDK still confused out hurr. 

[Brendon 146]

Well I used a grid and the streamdeck to help me calc share size depending on risk and share cost. Now I use Kyle's hotkeys which auto calcs share size and risk. 

Check out this video:

 

[Aiman 86]

6 hours ago, Sapperstien said:

Thanks big guy. Its the simple stuff like this that went right over my head in trading 101. I guess it comes from my trading perspective from another trading group that is always on max risk. Would say the name and you'd know who it is but dont know if that group's a swear word around here... 

I will greatly reduce risk/trade so that like you say I can feel comfortable with it if I lose it. 

Okay, that's kinda what I'm after. Like The info-graphic with the risk per trade based on stop loss distance doesn't take the price of the stock into account. So a $0.10 SL on a $250 stock is severely different than a $0.10 SL on a $2 stock. If I have to decided in real time on how far I want my SL to be from my entry then I have to check the infographic. 

That means that I still have to know how many share I can take for that stocks price per share and Im wondering how you guys do that in real time. I did the math for a $0.10 SL and a $1 SL on both a $2 stock and a $250 stock. The numbers work out to needing a $1000,$100,$125000,$12500 account respectively. Since the $125000 is clearly impossible I would have to decide my max amount of share for that stock price before I decide the risk per trade. Does that make sense? 

Im basically trying to figure out which comes first. The risk per trade calc or the account size calc. And how to do it quickly. 

Im thinking for now I just do the risk per trade calc and not trade stock more than like $50. 

IDK still confused out hurr. 

I like the way you think! And you’re right, share sizing is different depending on how expensive the stock is and how far your stop loss is 

I had a spread sheet before showing me how many shares I needed to buy depending on how far my stop loss is and I had different hotkeys for that. Now I use a hotkey which automatically calculates how many shares I can take depending on how far my stop loss is. Make sure to check The video Brendon linked! William explained kyles hotkeys there really well

[Sapperstien 74]

On 11/5/2019 at 5:56 PM, Brendon said:

Well I used a grid and the streamdeck to help me calc share size depending on risk and share cost. Now I use Kyle's hotkeys which auto calcs share size and risk. 

Check out this video:

 

Wow. This is super helpful. Im definitely gonna be using this. Already imported into DAS.