Maximum leverage and stops

[InteractiveAssets]

@WiseTrading

I will make it even simpler : A trader with $10K in his account buys S&P 500 futures at 4 000 and his stop is 8 points (meaning he exits at 3992). He is willing to lose 2% on that long trade.

What is the maximum leverage he can use?

@WiseTrading

So, contrary to what most people think, high leverage does not necessarily mean high risk.

So instead of asking “am I using too much leverage?”, the trader should say : 'What percentage of capital am I going to lose if my stop is hit?"

If the “logical stop” is $8 below an asset and they are willing to lose 2% then they are only willing to use 25x leverage.
$10,000*0.02/8 = 25

If they are willing to lose 4% then they are willing to use 50x leverage.
$10,000*0.04/8 = 50

Trader 2 is taking on more risk than trader 1 even though they are both using the same logical stop of $8 below the $4000 price.

C2 doesn’t let you see the historical record of the stops a trader did or didn’t have in place just orders that get executed. It does show a strategies overall leverage use. This is a good metric to look at as risk is higher if you use more leverage with the same logic stop of 8 points etc. assuming a stop is even being used.

What is the right order

1+2+3 =6
2+3+1 =6
3+2+1 = 6

It doesn’t matter mathematically. Likewise if you have your logical stop of $8 below etc. it does not matter if you first pick leverage then calculate your capital to risk or first pick your capital to risk then calculate allowable leverage. If you end up with more leverage you are risking more capital.

If you can agree that “leverage increases risk” then I agree whole heartedly and we are stuck in some pointless loop of discussing order of operations or something that we aren’t agreeing on, and probably isn’t worth the effort for either of us.

If you can’t agree that “leverage increases risk” and don’t think you ever will, then I will just wish you luck with your future accounts, systems, and trading. Though I must say if you believe that I will worry for you as I feel you are setting up your tent in the middle of the crosswalk.

I have seen this ruin so many traders. I’m not saying a trader can’t blow up without leverage. You could buy a penny stock with 100% of your capital and it could collapse causing you to lose everything without ever using more than 1X leverage. Leverage isn’t the only risk to check. However, it is a good first metric to check imho.

Allocating only 10% of a strategy to one penny stock and the other 90% to cash will result in a leverage metric of only 0.1 I think we can agree 10% allocated to a a penny stock is less risky than 100% allocated to a penny stock.

The leverage metrics on C2 are one of the simplest and most helpful metrics for finding strategies to avoid. Of course, it isn’t the only metric to review nor a perfect predictor, but the odds of long-term success go down dramatically with high levels of leverage use. This is why so few survive long with 10X leverage etc.

[WiseTrading]

@InteractiveAssets

If the “logical stop” is $8 below an asset and they are willing to lose 2% then they are only willing to use 25x leverage.
$10,000*0.02/8 = 25

No, 8 points not $8 stop loss.
Next time think twice before hitting that C2 reply button.

And please don’t feel obligated to write books, a simple mathematical answer should do.

[JITF]

@WiseTrading

Could you please explain your comment, I don’t quite understand it.

I am not sure what need to be explained, but let me try.

@WiseTrading

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.

If it would be real money in the game, I bet you would go into this “futile endeavor”. Also if your potential subs who trade real money would lose 40%, I bet they will not consider account restoration as “futile endeavor”.

On the other side. You made 18% in two weeks (from one of your other posts), based on the other statements your system was backtested and you trust it and use controlled stops. To get back to 100% with this system you need to spend 8 weeks (a bit less than 2 months) only: 0.60 + 4 * (0.18 * 0.6) = +3%. Considering no re-investment. So,

@WiseTrading

it could take years to do that, if at all.

doesn’t make any sense after such successful trading results.

@WiseTrading

What is easy, exactly?

Easy to abandon system, get new account name and start from the scratch when you trade only demo money.

[InteractiveAssets]

To keep it short.

@InteractiveAssets

“leverage increases risk”

Yes, no? Yes.

[InteractiveAssets]

You could be someone completely different but you @WiseTrading / WiseTrading remind me of or likely would be very similar in your trading ideology as
@GordonGekko2 / GordonGekko2
@ForexStar2 / happytrading

Killed systems data

[image] Last night it said ForexStar2/HappyTrading hadn’t signed in for 29 days. Glad to see you’re back. Must have been the tag that alerted you to sign in…unless you weren’t tagged with an @ForexStar2 and were just mentioned as ForexStar2 without a tag…maybe there is another reason you came back. To be fair, I know @DwightSchrute really really well [image]

[WiseTrading]

@JITF

Easy to abandon system

I see.

And how many systems did you abandon in the past, beside this one, the one from your so called “good friend” ?
https://journeyinthefog2.blogspot.com/

But, perhaps, your systems are profitable right from the start, and never produce any drawdown at all, who knows.

Is your “friend” still beating the market, and if so, where can we see his results ?

Enough said.

[WiseTrading]

@InteractiveAssets

You could be someone completely different but you @WiseTrading / WiseTrading remind me of or likely would be very similar in your trading ideology as

Please refrain from posting off topic messages and stick to the subject.

[InteractiveAssets]

“leverage increases risk”

Yes, no? Yes.

I guess I’ll take a dodge as a no to this question and probably a yes to are those your old profiles. Guess I am not going to change your mind. So good luck with your future systems.

[WiseTrading]

@QuantTiger

Note, drawdowns of 40-50% is hard to recover, but it is possible (I’m trying to do that myself!)

Recovering from a 50%+ drawdown is still doable, but it is indeed very hard, because the trader must not only make 100% just to break-even, but he must do so with only half of the capital that he had before!

And of course the worst 50% drawdowns are those that come directly from his starting capital (he started with $100k and is now down to $50K for instance), versus drawdowns from accumulated profits.

But anyway, good luck with your AI systems.

[WiseTrading]

@InteractiveAssets

“leverage increases risk”

It’s like saying that fast cars are dangerous. Fast cars are dangerous only if the driver decides to drive fast and exceed the speed limit (3% stop), period.

[JITF]

@WiseTrading

And how many systems did you abandon in the past, beside this one, the one from your so called “good friend” ?
https://journeyinthefog2.blogspot.com/

I checked that link and didn’t find any system from so called “good friend” there? Can you be more specific, what system did you mean?

@WiseTrading

But, perhaps, your systems are profitable right from the start, and never produce any drawdown at all, who knows.

Should admit that some of them are profitable from the start, but drawdowns are inevitable in our business. Unfortunately. The question is what is “from the start” - first trade, first day, first year.

@WiseTrading

Is your “friend” still beating the market, and if so, where can we see his results ?

He doesn’t sell anything, so no need for him to show his results anywhere. But yeah, beating.