The opinions expressed in these forums do not represent those of C2, and any discussion of profit/loss
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.
My 2 cents, for any system, assume trader follows a system (meaning not changing core methodology all the time), there is likely to be periods where system just cannot do well. My system did horribly the past 2 months or so, and I just cannot get them to do well in backtests over the past 2 months (Sept/Oct), no matter how I adjust parameters or hyperparameters of the system. I can get them to do BETTER (but still losing money), which is good. There will just be periods of long continuous loses, and if that hasnât come yet, itâs highly likely it will.
Given that, if a system has a max drawdown of 2% per trade, it can still lose over 20 trades (and experience a 30%+ draw down). About leverage, letâs say you have two systems, one trading at 1x leverage, and one at 20x leverage, but both sticking to 2% account value stop loss per trade. The 1x leverage system will be less likely to suffer a huge drawdown still, because during volatile times where market goes against the system, the 1x leverage system will probably hit itâs stop much less often than the 20x leverage system using tighter stops to achieve a 2% stop.
Any update on why the drop? How much leverage are you using? Itâs hard to read from the chart alone but it looks like a -30% return in two weeks and a drawdown of -40%. Quite different from the one week results. Is it just an error with your stop entries or an error with C2?
Indeed, because the system made 18.4% the first week, all C2 fees included.
Then I became cocky and started trading more aggressively with the profits. I placed trades without waiting for confirmation and engaged in revenge trading when the market did not immediately cooperate.
As you know, revenge trading is by far the most expensive and dangerous trading behavior, because it can spiral down fast, and the trader usually ends up with disastrous financial results, as you can see in this case.
After reaching 40% drawdown I decided to abandon the system (last trades were made without a stop) and move on.
In my opinion, trying to recover from a 40% or 50% drawdown is a futile endeavor, it could take years to do that, if at all.
So yes, we can still lose even with a 2% stop and the appropriate leverage, if we let our emotions interfere with our trading plan, especially when we are winning fast at first.
A stop cannot be hit âmore oftenâ during periods of volatile market conditions, because the backtest has (presumably) already determined the optimal stop to use, in ALL market conditions (low AND high volatility).
When the location of the stop is known, finding the appropriate leverage to use (based on the percentage of capital the trader is willing to lose per trade) is automatic, even if the stop is volatility-adjusted.
In other words the trader cannot possibly use âtoo muchâ leverage if his risk per trade is small (in percentage), unless he decides to bypass the calculations and place risky trades.
But again, he needs to trade highly liquid financial instruments that create minimal slippage when the stop is hit. That also means daytrading or scalping the market during active trading hours and liquidating the positions before the end of the trading session, to avoid huge overnight or weekend gaps.
Corn or soybeans, for instance, can re-open limit up or down at 8 PM (New York) and create substantial losses.
Letâs just say this hypothetical backtest says we should be long the SPY during market hours tomorrow. But the trader wants to only risk 1% of their capital. If they use 1X leverage they need to set a stop at 1.00% below the open price to not exceed a 1% loss on capital. If they use 20x leverage they need to set their stop at 0.05% below the market price. I wonder which is more likely to get triggered even though both would result in a 1% loss on capitalâŚ
Whether they use margin loans, options, leveraged ETFs, futures, etc. the math is largely the same, a 1% of portfolio value stop is more likely to be triggered if the leader is using more leverage.
I admire you for not ghosting the conversation. However, it could be worth considering if this disagreement you have with @QuantTiger could be part of the reason your strategy was down 40% in its first two weeks while his has an annualized return of 67% over a 3.5 year period.
More leverage is more risky. If someone disagrees I dare them to trade with an average 20X leverage use and see how long they can last. I doubt they can last 5 years.
This is true if the backtest guarantees that the stop wonât trigger more often in volatile market conditions in the future.
The thing is, a backtest doesnât guarantee the future. Even years of consistent good performance doesnât guarantee the future. The future can and will be different, and this should be expected. Backtests also suffer from over-fitting. The more complex a strategy is, the more the risk of overfitting, generally.
One note, if trading is discretionary, backtests are even less reliable. Backtesting is best with purely non-discretionary trading, which would help prevent ârevengeâ trading.
Reading what you wrote more, yes you are right, if backtests determine optimal stops for higher leverage of 20x, is not hit often, then yes the expectation should be that it will be similar in the future.
The thing is, using leverage of 20x, requires a very very tight stop (for example, 0.05% stop to achieve a 1% account value stop). Generally speaking (not talking about any specific systems), systems that trade with very high leverage blow up eventually. If those systems had backtests that did great, my suspicion is that with those tight stops, the system was developed to work for the backtest period, and the situation where it blows up came later.
The other possibility is the system used martingale, and it can backtest well, but blow up in the future.
Note, drawdowns of 40-50% is hard to recover, but it is possible (Iâm trying to do that myself!). The more risky a system is, the higher the expected drawdown generally, but it can still be profitable with a 50% drawdown. Take BNH SP500 as a system. Most would say this is profitable, and it has suffered drawdowns of around 50% two times in the last 30 or so years, and most recently a 33% drawdown.
Again, no, because you are using the calculation in reverse.
You do NOT choose the location of your stop based on the leverage you want to use, you choose the leverage based on the location of the stop (and the % of capital you are willing to risk of course).
A trader cannot say this for instance : âLetâs see here, I want to use 10X leverage on this trade, so I need to use a very âsmallâ stop and place it here, at this levelâ. (?!?!?!)
The exact location of your stop is determined by the specific rules of your backtested system, it does not change from trade to trade, and it certainly cannot be changed to âaccommodateâ the leverage you want to use.
Each mechanical trading system has its own optimal stop. That means selecting a âsmallerâ or âlargerâ stop (based on the leverage we âwantâ to use) will only deteriorate its performance, or even turn it into a losing system.
Leverage depends on your pre-determined stop, not the other way around (like your post seems to imply).
The stop was chosen by how much you were willing to risk in the scenario. Take away the stops in the example. Say you did a backtest with no stop loss and your system was designed with none. You would almost certainly have a larger drawdown if you traded with more leverage or more exposure. Being exposed to 1.25X the SPY vs. 1X would have a larger drawdown.
More leverage is more risk regardless of how good your backtest, system etc is or isnât. It is irresponsible to preach that more leverage isnât more risky.
If someone is about to blow up their account or others I thing it is good to warn people. If they still want to take the risk and not listen so be it. Unfortunately I think C2 and trading in general is confusing for many and they trust people that way over promote the benefits and minimize the risks.
Unfortunately it seems that 8/10 times when I say watch out for xyz system due to reasons abc I sadly tend to be proven right within a year - often less.
No, the optimal stop must be determined by the backtest, and the backtest only, assuming the system has clearly defined trading rules, otherwise the trader is just gambling and placing random trades.
The percentage of capital the trader is willing to lose, on the other hand, it up to the trader. Some traders set it this percentage to 1%, 2%, 3% or 4%, it depends on their risk tolerance.
Itâs like saying that crossing the street is risky, so never cross any street.
Leverage is simply a tool, itâs up to you to use wisely.
It seems that you have time understanding this simple concept, and you simply assume that leverage is inherently bad.
Iâm not against leverage. I use it. it is like Iâm saying that if you live in the cross walk you are increasing your risk. if you cross like you are supposed to there is still risk but it is worth it. It is a reasonable risk. Not all systems do a profit target loss target per trade. I use leverage. I love it. But it is more risky. If you want to build your house in the crosswalk you are going to run into problems.
No, the optimal stop must be determined by the backtest, and the backtest only, assuming the system has clearly defined trading rules, otherwise the trader is just gambling and placing random trades.
The percentage of capital the trader is willing to lose, on the other hand, it up to the trader. Some traders set this percentage to 1%, 2%, 3% or 4%, it depends on their risk tolerance.
If that is your system great. We will see how it works for you. Some people such as myself donât use technical analysis to set stops. We do it based on how much we are willing to risk. Good luck with your technical analysis method.
My friend, if the asset you are trading is at $10 and your stop at $9, then you CANNOT possibly use ANY leverage at all, if you still do not want to risk more than 2% of your capital.
Leverage in this case should be zero, end of story.
