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Leverage, Margin and Trading Account Capitalization [Premium Articles]

Posted by Price Action Lab Blog on December 6, 2012

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Optimum Asset Allocation Weights Depend on Past Data

This is a brief introduction to margin and leverage. After the relevant terms are defined and common misconceptions are clarified I present simple formulas for calculating the trading capital size that is required for minimizing the probability of ruin when trading highly volatile markets such as ETFs, futures or forex.

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Hypothetical or simulated performance results have certain inherent limitations. Unlike an actual performance record, simulated performance results do not represent actual trading. Also, since the trades have not actually been executed, the results may have under- or over-compensated for the impact, if any, of certain market factors, such as lack of liquidity. Hypothetical trading results are also subject to the fact that they are designed with the benefit of hindsight. No representation is being made that any account will or is likely to achieve profits or losses similar to those shown.

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