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is not indicative of future performance or success.
There is a substantial risk of loss in trading. You should therefore carefully consider
whether such trading is suitable for you in light of your financial condition. You should read,
understand, and consider the Risk Disclosure Statement that is provided by your broker
before you consider trading. Most people who trade lose money.
Saying that shows great returns can be obtained with high leverage AND minimal risk due to a track record one relatively short in the investing world isn’t a great idea in my opinion. You could have said the same about this strategy at this stage.
Then you get hit by something completely unlike the backtest or forward run. Either way without leverage and maintaining diversification there is almost not chance of a sudden drop as big as below.
I’m not against leverage. I’m not opposed to traders having drawdowns. I am not in favor of people spreading the message that increasing leverage doesn’t increase risk. I am also not in favor of people spreading the message that a track record particularly a short one " shows that great returns can be obtained with high leverage AND minimal risk (assuming the trader never deviates from his tight risk control protocol)" Risk controls are important such as sizing, diversification, stops etc. but they don’t make it so.
High use of leverage doesn’t require a large financial event to cause catastrophe… That is the thing. Large leverage results in big drops from small underlying moves. Sure your strategy can say a certain price or stop is ideal. But if you use more leverage it is more likely that the asset will have enough volatility to hit that stop etc.
That assumes that the stock does not gap down on news, for example vfc dropped 14% on an earnings miss last week so in scenario 1 you would be down 14% and in scenario 2 you would be down 28%… leverage =>Risk.
I was assuming liquid and open market trading only, but there are always things that can happen even if unlikely. Even a day trader can get caught in a gap down.
An unlikely scenario but it could happen that the stock is fine but the overall market shut down from the emergency triggers then the stock can’t be sold and it gaps down during the emergency market pause. Or there could just be not enough liquidity suddenly in a panic to get a person out at their stop.
There is always more risk in at least some way with more leverage.
No, for the last time the location of your stop depends on the specific trading rules of your system, not on leverage.
If you choose a different location for your stop (other than the optimal stop level) the performance of your system will quickly deteriorate or even becomes negative, leverage or no leverage.
If your system says that the optimal stop in this scenario is located at the $98 level, then you cannot choose 99, 97, 90, 57 or any other number simply because you want to use “more” or “less” leverage, this is the most idiotic thing to do.
In fact I have never heard of such nonsense, period.
Each system has its own optimal stop, mess with it and your strategy will underperform or even turn into a losing system.
For instance let’s say you buy breakouts from rectangle formations and a backested reveals that the best stop to use for maximum profits is the low of the breakout bar.
Then that low becomes your optimal stop.
That means if you use any other stop, like the bottom of the rectangle for instance, you will make much less money or even lose money, in the long run.
That’s why we need to daytrade or scalp very liquid financial instruments (US Treasury Notes, US Equity Index, Crude Oil, Gold, EuroStoxx, etc…) that create minimal slippage even if the market makes a sudden move and hits our 2% stop.
Otherwise, and I will repeat that again, leverage can crush any trader in a heartbeat.
You’re right! I think any level of leverage can be safe if you use the right stops, have a good backtested system, follow it, and only trade liquid instruments.
PS: Just in case it was missed I don’t actually believe this.
Having a good system is the easiest part, because THE most difficult element to master is the emotional part.
The trader cannot afford to be disciplined most of the time, he must maintain a military discipline at ALL times, and never let his emotions (good or bad) interfere with his trading decisions.
That’s why very few traders ever succeed in this crazy trading business.
