There are countless risk models to be studied, adapted and applied to an unlimited number of trading models. In fact, for every participant in the market, there is a different trading model (and some have no model at all). No two persons think, act, view the market movements and work through a decision making process in exactly the same way. The greater your understanding of the market and risk management rules, the higher the probability of success. Although every participant has the opportunity to apply proper risk models, very few do so consistently, which is why there is a high failure rate in forex trading. Please view my video in the free members area on "Chris' 7 Laws for FX Success" and take it seriously. As well, download "Face the Trader Within"

But Chris, what does this have to do with 10:1 leverage? It has everything to do with it! What is the end goal? To grieve and complain about the CFTC at their rule changes? Or developing the skills to build a successful trading and risk model and a foundation for long term trading success?

In what I have seen, high leverage (100:1) has only served to assist poorly disciplined traders in losing money faster than they would otherwise. 10:1 leverage means that if a trader still does not have a sound risk model within their clearly defined trading model, they will continue to lose money, but perhaps at a slower rate. Traders who have taken the time out to understand the market and build a trading model based on their own unique psychological profile still have more than enough leverage to make money. In my view, 10:1 leverage in OTC forex trading is far more than is needed in the most aggressive models.

Of all the traders I have mentored that are now trading full time for a living, each has an absolutely impenetrable risk model in place that is implemented with discipline and highest respect for the market.

But Chris, my case is different. Yes, sure, every traders case is different, as it should be. But Chris, in my case, I have 200K risk capital I would like to allocate to forex trading and I only want to deposit $10K at the broker and trade like its 200K, so the balance of the funds remain in a safe place gaining interest. So, what's being said is that the CFTC is now restricting one from holding a position size of 1M (100:1) on a "mental cash base" of 200K is unfair. That one can't possibly make sufficient gains on trading 100K on a mental cash base of 200K, held on 10K collateral, which is only .5:1. If you are a good trader, you have plenty to work with. OK, still not satisfied? Look at it this way; sacrifice the interest differential between the broker and your safe institution (0.05%) on 10K and deposit another 10K and make it 20K so you are now trading unleveraged 1:1 on 200K mental cash base and can take a position of 200K total exposure. I personally don't encourage using the "mental cash base" model for retail traders, but it may work for some and can work with proper risk management built into the collateral being traded.

During the crisis, the major private banks were raising the margin requirements for FX deals to 20% (5:1) to protect clients from volatility as private client assets were squeezed. Generous margin requirements at an institutional FX desk are not lower than 6%, while retail firms were offering 1%, the point at which losses are squared.

I've been in this business a long time managing institutional funds. An observation to note is that the higher skilled successful traders take less risk and increase capital, while the lesser skilled traders that lack discipline take more risk and experience diminishing capital.

What is critical to understand is that if you operate outside of specific and disciplined risk parameters, a losing streak will not only generate a drawdown, compounded by higher leverage, but more importantly, will take a toll on your psychological capital. A hit on your psychological capital will destroy the concurrent development of your psychological profile and your trading model. Once a trader breaches the psychological breaking point, trading and risk models are usually the first to disintegrate in the traders regime which deepens the root problem.

We cannot get into all the details of the various trading models we implement with managed funds, but we typically trade unleveraged, unless there is a significant interest rate and positive carry advantage to reduce the overall risk. We may allocate a small percentage of the portfolio to a higher risk model, but position size still remains well below 10:1 leverage on the high risk allocations.

Is this just another one of those "Importance of Risk Management" articles? Yes.

*** Supporting Leukemia

25 Years ago one of my five brothers passed away after a fight with Leukemia. At the time, the probability of surviving the ordeal was remote and the kids would stay in a hospital ward where they'd become friends, only to watch one another pass away. We had started a small charity called the "Michael Lori Memorial Foundation" which is used to enhance the environment where the kids are suffering. As well, recent developments in the fight against cancer has improved the survival rate considerably.

Please view the attached one minute video on our project. Hopefully the link is working

http://www.wrh.on.ca/Site_Published/wrh_internet/windsorregionalnonav.aspx?Body.QueryId.Id=22988&LeftNav.QueryId.Categories

Chris Lori

CTA

FX Fund Manager

www.chrislori.com