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I think most people understand that leverage is risky. However, every now and then I run into people or a person that acts as though leverage can’t be the problem. These people seem to believe the root problem is always stop management, drawdown management, and trading methodology.
All are important, and I believe these are all connected. But there is no way to get a round the fact that leverage is risky. If you have 10X average leverage use versus 1X while trading the same instrument you are taking more risk in the 10X scenario even if you manage stops, drawdowns, etc. The risk can come in different forms such as how little volatility is needed in an underlying asset for a stop or series of stops to be hit. It comes up in the cost of leverage you incur. It comes up in decay for some instruments. It comes up in the futures curve cost. There are many ways it rears its head. More leverage is more risk. This doesn’t mean you can’t use it. I use leverage and really like it. But I know I am taking on more risk when I use more leverage.
If you want to quickly see how much leverage someone on C2 is using my first post at this link should help. It isn’t the only metric to check, but it is in my opinion one of the best predictors of strategies you will regret later. Having kept drawdowns low so far means nothing if you are using 40X leverage on the S&P. It is only a matter of time until the drawdown becomes much larger if the same exposure continues to be taken on average.
People are free to disagree and post why I am wrong. However, I will say all of these strategies below are strategies that had a user that opposed this idea publicly in the forums with me. If you want to see a larger graph just click on the link then change details to performance in the url. Unfortunately many of these look obviously bad now. However, at the time when they were listed many of them looked great with minor drawdowns and good returns. But if you use leverage and don’t give it the respect it deserves this is what happens.
For anyone that would like to disagree with my views by all means let me know. However, the great thing about C2 is you can have C2 track how good your results are. So I would love to see someone create a system that successfully has a 10% CAGR for 5 plus years while using leverage of 10X or more. Right now the best leveraged strategy that has survived 5 years on C2, with a 10% annualized return or greater according to the grid is using only 6.5 average daily leverage.
Again, your risk is not the leverage, the risk is the percentage you are willing to lose per trade.
You can use 20X leverage and still lose only 2% of your capital if your optimal stop is hit, assuming the financial instrument is liquid enough and creates very little slippage, even when the market is moving fast.
But apply that same leverage to illiquid assets like ether futures or some other shitty commodity like that and you are history (hello margin call), the stop won’t save you at all if the market makes a sudden move against your position, you won’t find any buyer/seller to bail you out because there is no liquidity.
Leverage cannot hit your stop, the market hits your stop.
And the location of your optimal stop itself will automatically determine the EXACT leverage to use to respect the 2% stop loss rule. That way you are never “over” leveraged when you enter the position.
When are you going to understand this extremely simple trading calculation?
Right, so according to you small leverage is better.
And yet, although you did use extremely small leverage, your own system (Patience is a Virtue) quietly managed to produce a 53.8% drawdown over the years, and is still in drawdown mode after 2 years.
(And we are not even talking about the number of times you had to reset or kill your strategies Strategy Activity Details: PatienceToInvest_com).
This is a textbook example that clearly shows that systems with small or even no leverage can also create big drawdowns over time, while still giving us the illusion that they are somehow “safer”.
I don’t disagree with anything you have posted so far regarding this topic. I am curious if you can tell us what the average leverage and maximum leverage is for this system: https://www.collective2.com/system28309886
I don’t have access to those metrics and I’m not sure if C2 even calculated them for this system since those metrics probably started being calculated only on newer systems.
Hi @ChrisFreeman. I am not sure which person you are saying you don’t disagree with, but I have seen your systems before and often wondered why you paused or stopped them. Unfortunately, I don’t know of any straightforward and simple way to calculate the leverage use, but I would imagine it was decently high in order to have such quick and large returns.
Do you mind if I ask why did you end the systems? Do you run anything now?
PS I would imagine if you combine the track records of your different strategies it would be above 10x average leverage and over 5 years and over 10%. If so you are the unicorn we have been looking for.
I thought I had clicked reply on your initial post, but by looking at the reply indicator on your first post it does not appear that I did.
A quick calculation for the final 3 days of my system shows that the leverage for that period is about 27x with 18x of that being the Eurodollar position. I could reconstruct the leverage data for the entire 3 years but that would be quite a project with perhaps little value; I merely threw it out there to anyone who might have enjoyed a “homework assignment”/project in Excel using the downloaded Trading Record CSV file (and perhaps the daily equity if that is available through API [otherwise those equity values could be approximated using the CSV file only]).
I stopped the systems here because: I never made much subscription revenue; very few subscribers could stick with these systems [this style of trading]; and I decided that I no longer wanted to offer trading signals to the public.
Currently I run a system that “rhymes” with these original systems but only in my own live/sim accounts. As much as I would like to “help” others, based on previous experience (including issues with the C2 platform) I don’t believe that posting systems on here adequately or effectively helps other people in the realm of finance.
You stopped here on C2 a long time ago. I think today you will get significantly more subscribers for your systems if you can repeat the performance. Check the Custom Leaderboard and then “Most Popular (AUM)” strategies. The strategies in the top spots look similar to yours from the past. If you then turn it into a TOS strategy and open it for the “C2 Distribution Network”, you will almost not be able to save yourself from subscribers.
You hear that InteractiveAssets , Mister Leverage-Is-More-Risk-And-Anyone-Who-Does-Not-Think-Like-Me-Is-An-Idiot?
By his own admission, this trader used 18X to 27X leverage just on his last 3 trades alone and yet not a SINGLE closed position exceeded 2.2% drawdown, after 3 years of non stop trading and close to 1 000 completed trades!!
He used “high” leverage with total discipline and was able to turn $100K into $1.18 MILLION in 3 years and you still claim that leverage is more risk.
Get real buddy, look at his fantastic track record and see for yourself that “high” leverage, used wisely and with strict money management rules, can produce fantastic returns with minimal risk.
@ChrisFreeman once again very impressive results. I took a swing at calculating the leverage ratio EOD. I may try and clean up the calculations a bit because there may be some spots I missed where the leverage for certain contracts changed that I didn’t catch. But I should have caught most of them.
This is my current best estimate with a rough attempt measuring at the close each day. I wouldn’t be surprised if the average leverage is higher if intraday could be included, but I’m unsure.
I do believe investors are almost always increasing risk to some degree by using more leverage… Which it seems you don’t disagree with, but either way those are some impressive returns on your strategy.
1: His leverage went as high as 57.45 (and probably higher according to you)
2: after placing almost 1000 trades in 3 years he generated a 1112% return
3: Not a single losing trade exceeds 2.22% of trading capital, let alone 3%.
4: his maximum drawdown is 31.3%
And yet you still maintain that high leverage is inherently bad.
A good intra-day trading or “short-term” trading algorithm with tight stop loss control COULD achieve such a good result utilizing high leverage. The key is a “good” system and with tight stop loss control. That’s what I am hoping to achieve.
I cannot say a system that hold over more than a week with such a high leverage. No matter futures or forex markets. A sudden event could wipe out the whole account. Sometimes even stops won’t work in a gap-up or gap down situation.
This is not my intention. There is plenty of room for differences of opinion and different investing methods to work.
I can vibe with nearly everything you said here except the “minimal risk.” I think high risk was taken to obtain those returns.
Sometimes high leverage systems are less risky than others systems with less or equal leverage if you factor in market type, time invested, stops, etc. (10X SPY vs 10X Eurodollar etc.
I’m not against leverage use entirely by any means. I’m opposed to the idea that we can control things to the degree that increasing leverage doesn’t increase risk when other variables are kept the same. I can almost hear you thinking “stops, liquid instruments, day trades only” but I think there are still risks that get elevated even with the methods you have described previously.
More leverage is more risk assuming other variables are kept the same - generally.
I do not think it is true to say that a strategy has minimal risk based of previous returns and lack of drawdown.
This came from an email I got the other day from C2.
Interesting that 56.2% of strategies using leverage greater than 3.25 go on to lose money over the next 180 days. I would be curious to know what percent of all active strategies go on to lose money over the next 180 days.
Screenshot from the Grid today and compare with the screenshot from the Grid in half a year. Then get trades from all systems via API and calculate approx. leverage. Easy, but tedious and time consuming.