Warning to C2 Users

Strategies that are run by managers with too much confidence, leverage, and activity often end up losing big! So be cautious. They could be the next 1 in a million opportunity, but there is a graveyard of strategies that have come and gone due to too much confidence, leverage, and activity.

1. Don’t be overly confident

Investors need to think and speak in probabilities. If they don’t, then they are likely overlooking real risks. Even if the risk of something happening is small it should be considered and acknowledged.

2. Don’t use too much leverage!

The vast majority of strategies that survive 3 years or longer use less than 5X leverage on average. Leverage can be very helpful, but too much of a good thing can be deadly. Of the strategies that have positive returns, are three years old or older, and appear on the Old-Timers board the average leverage use is just 3.1!

3. Don’t be too active!

Day trading is extremely difficult to do successfully and even harder to do on C2 successfully with AutoTraders following. For reference, of the strategies that are three years or older on C2 and appear on the Old-Timers leader board the average trades per day is 0.5!

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Hi InteractiveAssets,

Could you please show us any official proof?

And what about the hundreds (thousands?) of trading systems that did use less than 5X leverage but still went bankrupt (or were simply simply abandoned due to heavy losses) after X days, months or years, do you still include them in your study or are they conveniently ignored?

Again, are you only talking about the few “survivors” or the entire universe of C2 systems that started since 2001 (more than 45.000 systems and counting according to C2 main page)?

Thanks.

I’m just looking at the old-timers filter in the leaderboard section and scraping data from that. Certainly plenty had less or more than 3X leverage and failed. The average of the survivors was 3X leverage and only a few had more than 5. I’m only looking at what has made it to the old timer board. I’m suggesting that if things look very different from the survivors they have a lower chance of success.

This statement has no statistical validity because we still don’t the number of “low leverage” systems that went bankrupt or lost 70%, 80% or 90% of their trading capital during the last 21 years.

And if you still believe that low leverage strategies are “safer” go to the Leader Board ( Leading Trading Strategies ), sort the systems by Maximum Drawdown (from high to low) and look at the top 2 systems. They both use an extremely low leverage (0.99 and 0.89) and yet their drawdowns are greater than 82% (I am not making any judgment, or criticizing my fellow traders, just stating a simple fact from the data available on the C2 Leader Board).

And think about it, stock day-traders use 0 (zero) leverage and yet according to an analysis of trading data of more than 80,000 traders a whopping 80% of stock day traders post a median loss of -36.30% over the course of a year. After 2 years only 1% of these traders are making some money (or barely breaking even).

As you can see, even ZERO leverage financial instruments cannot save the vast majority of stock day-traders from losing their money.

Leverage has very little to do with the profit/loss result or the drawdown, it’s the risk per trade in percentage that matters.

In other words, the size of the stop.

On the leverage topic, the survivors have a leverage ratio almost exclusively between 0 and 5 with an average of 3. Everyone is free to agree or disagree with my analysis on whether that is important.

I certainly agree that someone can do poorly without the assistance of leverage. A car crash can happen at any speed.

Yes, it is a fact and nobody can argue with that.

But did you also notice that almost half of these “low leverage” old timers have a drawdown greater than 50% (the highest being 85.9%) ?

See for yourself: Leading Trading Strategies

Low leverage systems cannot guarantee the reduction of the risk or the drawdown in any way (even if they do appear safer on an intuitive level), as these systems from the Old Timers Leader Board and the dismal performance of stock day-traders using zero leverage clearly reveal.

If they had taken all the exact same entry and exit prices and timing but used more leverage their drawdown would have been larger too.

You clearly seem to believe (or assume) that more “leverage” means that the trader is now using a bigger stop in percentage.

It is simply not true.

More leverage simply means that your broker is allowing you to control more stuff with the same amount of money.

If broker X allows you to buy $100 000 worth of gold with only $5 000 of margin then your leverage is 20 to 1.

If broker Y allows you to buy $100 000 worth of gold but wants $20 000 of margin then your leverage is 5 to 1.

In this example, Broker X is offering you more leverage.

Leverage has nothing to do with the risk per trade in percentage, these are two completely different subjects.

If they exited at the same prices as before - all else being held constant - they would have larger drawdowns if they used more leverage.

In your scenario, say gold drops by 1%, do they both have the same equity drawdown? A 1K loss on 5K equity versus 20K is a huge difference. Sure they could have different stops. I’m not saying that isn’t a variable.

Leverage is not something the trader can control, only the Broker can change it.

Yes, because the stop (in percentage) remains the same.

Again, no matter how many contracts/lots the trader buys/sells, the risk (stop) is exactly the same, in %, so both traders will lose the same percentage of trading capital.

Leverage has nothing to do with the risk per trade. A 2% stop is a 2% stop, no matter what leverage you are working with.

Well I don’t think we are going to come to an agreement. Good luck!

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The problem comes from the definition of leverage.
Good luck too and have a good weekend.

And now, a word from our sponsor!

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