I promised myself a long time ago I would avoid the really sensitive belief biases about trading. But I’m a glutton for ridicule, finger-pointing and nay-saying…
I did a research project several years ago that at one point had been published on fxstreet. I can’t find it any more so they probably ditched it as it wasn’t very broker friendly. The gist of it was, almost anything over 10:1 leverage will almost guarantee an account will eventually blow up. That article by the way made me quite popular (okay not so much lol).
The typical response to my argument is, if you use stops you can avoid the large draw-down. My response typically was “prove it”. Based on my research - and I’m still waiting for something substantial/scientific to prove me wrong - if you use stops anywhere inside the daily volatility range you will only increase the number of times you get stopped out, with many of those actually being when you had the trade direction correct, and the net loss over time is nearly the same. If you use it outside the range, the use of any leverage will eat your accounts lunch with a quickness.
So here is a pretty good example of what I’m talking about. We’ll use my old 2012 model with the entry of 22:45. Here is what it looks like with no leverage.
Looks like a typical model that has ups and downs.
Here it is with 5:1 leverage.
Now 10:1
And finally 12:1
Poof… Account zero’s out before you can recover. I’ve seen this so many times in my work I can’t even tell you and the kicker is, you never know when your approach is going to suffer, for how long or how deeply. This is why when anyone asks (I can almost hear you asking) I say, trade small, really small and grind along. If that doesn’t fit into your goals as a trader, then you need to rethink your goals or look for other ways to capitalize on your trading success (manage funds - although that is getting hard to do to).
That’s just my opinion though (based on years and years of research, trading and modeling), so feel free to fire away, I’m tough, I can take it… - JP
Now that is interesting. I assume the model base was the same for all examples,with that in mind.
I want to know what the results were with a higher success rate?
Here’s the interesting thing Kasravi, success rate is always a snapshot in time. there will be times when the (any) approach will do much better and times when what triggers a trade is less meaningful. If we plan on trading for more than six months or a year or two we know we are going to hit periods of reasonable inefficiency. Those are the ones that wipe it out. The only way avert it is to just be “dumb-lucky”. i.e. you made a small fortune in Vegas and walked away never to return.
If trading is a career we have to plan for the complete career cycle which includes the inevitable draw-down, model melt down etc. If we stay at it long enough, it will come. How we trade today often dictates if we can survive “tomorrow.” - JP
I certainly cannot argue that.
However I can’t get my head around it that lowering leverage is in anyway different than lowering market exposure ie; risk taking.
Agreed, I think they are basically the same thing. I just think there is a threshold of exposure that greatly increases (guarantees in the long-term) the likelihood that an account turns into a really expensive pdf. - JP
I’m aware how much of a killer leverage can be, and perhaps I misunderstood your post. Are you basically warning the new guys of how nasty leverage can be, or are you saying to stay away from it completely? If it’s the former, I completely agree. I trade with 50:1 leverage but I keep a drawdown of 1.30% as I never risk more than 2% on any given trade. Keep it small and hammer away. If it’s the latter… well I WISH I could trade 1:1. :53: Thanks for the interesting post!
Looking at it from a risk management perspective, lower leverage helps in bringing realism into trading. I don’t see any reason for using anything more than 1:10 for more than 200K. Do you?
Personally, I don’t. I know a lot will disagree. Forex has a very low barrier of entry which is one of the reasons it’s so popular with the individual speculator. But that is also part of the built in problem. Low funding levels require higher leverage to meet the minimum trade size, that increases the use of tight stops which increases transaction rates and improves the commissions for the brokers. They love it, but it’s no good for the end user.
When I was a CTA I was also an IB for FXCM & RefcoFX, I made more money off the commissions generated by my scalpers than I did off my research or managed accounts. It was insane how much people traded and how much revenue it generated. It also gave me a birds eye view into what accounts were surviving/thriving and which ones were blowing up.
Having said that, if you don’t give a crap about your clients, having about 10 scalpers with 100k each in their accounts pulling 10 to 20 trades a day at 100:1 doesn’t suck. Watching them turns those accounts into dust in less than a year does however. It’s the nature of the business though, and everyone has to walk their own road and learn their own lessons. You try to help where you can, but typically they have to live it before they get it. - JP
