Leverage And Commodities by J.M. Malley
Malley explains how to determine the appropriate amount of leverage for commodity trading.
A winning trading system is a worthy goal, but there's the question of how much to put on in a trade or, equivalently, how much to lever yourself up in a trade. That aspect of trading, money management, is usually addressed with platitudes or difficult and inexplicable mathematics. Simply, risk, which is the probability of losing, is what you work toward reducing when you improve your trading system. Exposure, which is the amount you can win or lose, is controlled by the use of leverage.
Let us look at a simple technique for calculating the leverage that produces the maximum growth for a trading system. Then let us extend our results to a more sophisticated technique that will give the trader the means of selecting the leverage - referred to here as ideal L - that best suits the individual's style and taste for exposure.