How To Manage An Over Leveraged Position?

It's never something nice to deal with, but there is really only one way out of a over-leveraged position. Close it.
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Giles Coghlan
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Correctly Manage An Over-Leveraged Position

Just had a great question in the feed from a subscriber who said “How do you manage “an over-leveraged position”?

Now, this is a really good question. Imagine the scenario you’ve entered a position, let’s just say for the sake of argument, let’s say that you entered a Canadian dollar, Japanese Yen long.


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You entered it up at 78 with very high leverage, and you’re now in a situation where the price is a couple of hundred points behind you. Maybe you’ve done the worst thing that you possibly could. You’ve moved the stock loss down each time, constantly hoping that price is going to recover.

Now, in this kind of situation, as hard as it seems, the best thing to do is to close the position. If you’re over-leveraged, you’ve risked too much, the best thing you can do, close the position, liquidate it, take a couple of days off of trading if you have to, maybe even a week. Just regroup, consolidate and think to yourself why did I over-leverage? What was it that prompted me to take too much risk? Now one of the things that we recommend is trading without leverage. Allow your trade size to match your account size. If your account size is $,1000, trade with $1,000, which is a 0.01 micro lot. If your account size is $10,000, then let your trade size be a mini lot 0.10 of a standard lot. And if your account size is $100,000 US dollars then trade with one standard lot. This is trading without leverage. A great question.

The best way, in my view, to manage an over-leveraged position is to close out completely and to regroup. The problem is is that you don’t know how the position will turn around. You don’t know if it ever will turn around. And by adding a number of different positions to it you just end up complicating the already tricky position and potentially making a bad situation worse.

Often by cutting as quick as you can you actually limit the damage that you would otherwise do. And also another question we had was, “Whereabouts would the Canadian dollar, Japanese yen stock loss be in this trade”?

We’d been looking at cad yen shorts from the 76 handle. The best place to put the stock loss here, I would just pop it above the 76, 80 level. And remember, with the dynamic stock loss placement we’re not expecting the stock to be hit. If we start seeing pricing moving up higher and higher, if there is a sentiment change, obviously we’d want to move out the trade very quickly.

We’re not expecting our stock to be hit. Anything probably above that, we’ve got the 77 big round number here. I think anything above that 77 handle actually would be pretty good. 7710, if there is a sudden spike up, you may not get taken out if it’s going to suddenly retrade, so you get these stock loss hunts and a bit of volatility at the moment.

So you don’t want to run the stock too tight. But remember, with the dynamic stock loss, you’re not necessarily expecting or waiting for your stock to be hit.

If sentiment changes, you would of course change the position. Canadian dollar, Japanese yen short still valid. And of course we will let you know if that situation changes.



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