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What is Asymmetrical Leverage?
By Sean | March 22, 2008
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Topics: Income | 3 Comments »
December 15th, 2009 at 6:18 am
Hello Sean
How can I receive the Asymmetrical Leverage spreadsheet? Thanks and nice website.
December 22nd, 2009 at 11:46 am
but what is the definition for assymetric leverage at all???
January 5th, 2010 at 12:22 am
Ed: Asymmetrical Leverage occurs when you have a minimum position size that is too large for your account size to be able to reduce your % of risk as you sustain losses — OR — unable to efficiently (proportionally to your account size) increase your risk as your account grows.
For example if you have a 10,000.00 account and your minimum position size is 100,000.00 then each pip of market movement can cost you 10.00. That means that a 50 pip stop loss can take away 5 percent of your account in one trade. Let’s say you take 4 – 50 pip losses in a row and your account is now only 8000.00.
when you began trading your risk was 5 percent per trade — which is extremely high. Now after only four losing trades your account is at 8000.00 and your minimum position size is still 100k. The next trade you take risks 6.25 percent and that keeps increasing as you draw your account down.
Going the other way let’s say you make 4 winning trades of 100 pips each. Your first trade risked 5 percent but each trade after that you risk less than 5 percent as your account grows. Let’s say you traded your way up to a closed equity of 13,000.00 — your risk is now only 3.8 percent per trade unless you add another contract. If you add another contract your risk is suddenly doubled to 7.6 percent per trade.
Your trading system is no better or worse than before and the probability that any given trade will win or lose is unknown and therefore has a value of 50/50. Why should the risk per trade vary if the probability of an individual trade remains the same? The answer is that your percentage of risk should treat each trade the same unless you assign trades to categories like A, B, or C — but that is a different issue entirely.
Asymmetrical Leverage is when bias is either systematically or randomly assigned to trades in your trading system due to insufficient granularity of position size to maintain a constant percentage of risk — and NOT correlated with a trades probability of success.