Leverage , not trend, is your friend

As with most of the theories, society tends to simplify the ideas underlying complex and very specific knowledge.

First of all, trend is a term completely related to sector indices and it cannot be applied to stocks, bonds, currencies and so on. So forget about that saying unless you are investing with a very diversified portfolio, covering several sectors. And remember that, in any case, the trend is one among thousands of other factors. Therefore, apply only the trend and be prepared to lose.

Leverage is like a loan we get from the broker and we trade with it. Is the risk within leverage? No, it is not. Risk is in the relationship between your capital size and the amount of capital that you will accept to lose before closing a bad trade.

Let's see an example.

I have $100,000 to trade with and my account has a leverage of 1:100. I trade one lot that requires a margin of $1,000. Then, my initial risk are $1,000. My risk is 0.01.

I have $10,000 trade with and my account has a leverage of 1:30. I trade again one lot, requiring me to keep a margin of ~$3,300. Therefore, my initial risk is about 0.3, 30 times bigger using three times less leverage.

We consider that the take profit and stop loss levels are equal so that the absolute profit and loss will be the same in both cases.

Again, let's say I have $500,000 to trade. I fund an account with my broker of $50,000 and keep the other $450,000 at my bank. My total capital is $500,000 and if I apply 1:500 leverage, it would correspond to the same risk level that another trader using a leverage of 1:50 with these $50,000. Then, leverage allows me to keep my money at my bank, not at the broker's account. Hey, and I have also highly mitigated the risk of my broker going into bankruptcy and losing all my money, because know I have my funds at my own bank.

And of course, any trade must initially have two targets upfront, one for taking profits and another to closing it in the loss. Not to say about increasing or decreasing the position sizes, since trading management is a complex topic by itself.

In my opinion, it is crucial to get the most from every tool we have at our disposal. When trading or investing we must become the bank and the market our client. If we cannot control the funds and even the effects of leverage, we should better stay outside until we find a way to do it.