In my personal opinion, leverage should be used when you have enter a few trades. You have fully utilized all the capital that you have, but you still have the capacity to take more risks.

For example, if, let’s say, your risk parameter is 1% per trade, so you have opened up two trades and you size all your trades accordingly and you get into two open trades right now. Right now, technically, you have a 2% risk on your two trades. You realize that these two trades, I have fully used up the capital base, the cash that I have, which means that I have no more cash to open a third position, which I have the capacity to based on my risk appetite.

Having two open positions with 2% risk in total, that means even if both trades go wrong, I only lose 2% so I am actually comfortable of taking another few more percent of risk. I run out of capital. That is when you actually use the leverage facility to get into your third trade or fourth trade, which also allows you to have maximum exposure of about 4% in total with four open trades. That is what I will use leverage for. You don’t use leverage to calculate your position sizing.

Alright? Leverage is only used when you run out of capital, but you still have the risk appetite or the capacity to take on a few more trades.

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Philip Teo

Founder & CEO at Traderwave Pte Ltd
Philip Teo is an entrepreneur, speaker and trading coach who specialises in the field of Technical Analysis of the financial markets. He is currently the Founder and CEO of Traderwave Pte Ltd, a financial technology company that offers a web charting application to global traders. He has conducted many trading seminars and appeared on national television before. He is also currently an official speaker and trainer with SGX Academy. Learn more about him at his Google+ Profile, LinkedIn Profile and Facebook Profile

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