Q: In setting up your own simulation, it asks for an input on margin, but it doesn’t seem to use it when you run a simulation. Since I’m only trading FX and the Aussie 200 Index, which have 100 to 200% leverage, that is a problem. Also, you mention version 4.0, but when I talked to one of your customer service people they didn’t know when it might be available – I asked for some sort of a guess and got six months. Any suggestions on Monte Carlo simulators (free or up to around $100, eg Excel plug ins) in the meantime?
Re leverage, while there is some discussion, I don’t feel like I have a good feel for how leverage might impact many of the points/specific suggestions in the book. One of the areas where it is covered more than in passing is Table 9.3. However, I don’t understand the rationale behind the suggested reductions in portfolio heat. Also, if you have a SQN of 4 (I wish) how much do you suggest reducing portfolio heat if your leverage is 100% and how much if 200%? If your SQN is 1.7 to 2.5, why don’t you reduce maximum portfolio heat if leveraged?
A: 1% risk is 1% risk and it doesn’t matter if you are 100% leveraged or 1000% leverage. That’s critical. Now leverage increases the possibility of ruin with large gaps that go through your stop, but it doesn’t change your risk if you have a stop. Margin doesn’t enter into the game except that you cannot buy more shares of stock than you have cash. Simulators are discussed extensively in the Definitive Guide to Position Sizing.