Page 387 - THE MARKET WHISPERER

THE MARKET WHISPERER 38 3

Using leverage correctly brings successful traders much higher returns
on their investment. Here, too, the correct way of coping with leverage risk

is to define your red lines for leveraged trading. Avoiding any deviation

beyond the red line will prevent you from suffering heavy losses in the

future. If you are not cautious, one heavy loss can take you completely out

of the game forever.
Are you familiar with the double-down roulette method? It’s very

simple: you place $10 on the red in the hope of winning. If you lose and
black shows, you gamble on the red again, this time with $20, and so on.

Each time you lose, you double the bet until eventually red comes around

again, returning all your losses with the addition of a small profit. The

problem is that if you do this for a long time, sooner or later you will get

a sequence of the same color. I met someone who lost a huge amount of

money when red came up 24 times in succession! That’s definitely enough

to put the kibosh on what could have been a pleasant evening.
Now, back to stocks. By way of example, let us assume you are using

personal capital to the tune of $25,000. You set your loss red line for any
single trade at no more than 2% of your trading account: in other words,
you are not willing to risk more than $500 for any single trade. Strong self-
discipline is one of the most important aspects of trading, and you will

need to stick to this maximum loss factor which you yourself have defined.
Note that following a loss of $500, your trading account balance will be

$24,500, so that now 2% of that new balance will be $490. If you adopt the
2% factor, you will always be able to calculate in advance the amount of

money left in your account after a losing trade, however many sequential

trades may end up as losses:
• Following 10 successive losses, there will be $20,486 left in your

account
• 100 successive losses will leave just $3,315 in your trading account

The probability of losing 100 times in succession is extremely low, but
nonetheless you need to be aware of your red line at all times from the
angle of maximum loss as well as the single-trade loss figure.

Technical Risk

Correct entry and exit points must be determined, first and foremost,
according to the stock chart’s technical behavior. The exit point must be

planned in advance and cannot be set according to a figure you are willing

to lose, but rather based on volatility and the unique technical behavior of

each of the stocks in which you are trading. As we have already learned,