The benefits of leverage

pavilion103 · 24 February 2011

I am interested to get some opinions about leverage and the benefits (rather than focusing on the risks in this thread).

If you are using leverage but still risking 1.5% of your overall account size per trade, will this generally result in needing less starting capital to make the same return?
For example if I am trading with $50,000 and leverage that to $500,000 but limit the position risk at 1.5% of capital then this will increase trading opportunity closer to that available with a $500,000 account rather than a $50,000 account.

I am new to trading and am not suggesting I would leverage like this to begin with but for an experienced trader is 'more trading opportunity' the benefit of leverage? So when someone would usually require a $300,000 or $400,000 account to generate a $100,000 p.a. return, can this in theory then be achieved with a $50,000 account using leverage wisely?

Thanks,
Matt

Tysonboss1 · 24 February 2011

pavilion103 said:
I am interested to get some opinions about leverage and the benefits (rather than focusing on the risks in this thread).

If you are using leverage but still risking 1.5% of your overall account size per trade, will this generally result in needing less starting capital to make the same return?
For example if I am trading with $50,000 and leverage that to $500,000 but limit the position risk at 1.5% of capital then this will increase trading opportunity closer to that available with a $500,000 account rather than a $50,000 account.

I am new to trading and am not suggesting I would leverage like this to begin with but for an experienced trader is 'more trading opportunity' the benefit of leverage? So when someone would usually require a $300,000 or $400,000 account to generate a $100,000 p.a. return, can this in theory then be achieved with a $50,000 account using leverage wisely?

Thanks,
Matt

Simply, if you invest $10,000 and earn 10% you make $1,000,

If you use your $10,000 as a deposit and loan $90,000, and earn 10% on your total investment of $100,000 you make $10,000. So by using you leverage you have turned a 10% investment profit into a 100% return on your invested cash.

However, I know you didn't want to talk about risks, but you have to understand that it things went just 10% the opposite way, you will have suffered a 100% loss on your invested cash, plus the cost of interest.

skc · 24 February 2011

pavilion103 said:
I am interested to get some opinions about leverage and the benefits (rather than focusing on the risks in this thread).

If you are using leverage but still risking 1.5% of your overall account size per trade, will this generally result in needing less starting capital to make the same return?
For example if I am trading with $50,000 and leverage that to $500,000 but limit the position risk at 1.5% of capital then this will increase trading opportunity closer to that available with a $500,000 account rather than a $50,000 account.

I am new to trading and am not suggesting I would leverage like this to begin with but for an experienced trader is 'more trading opportunity' the benefit of leverage? So when someone would usually require a $300,000 or $400,000 account to generate a $100,000 p.a. return, can this in theory then be achieved with a $50,000 account using leverage wisely?

Thanks,
Matt

You risk 1.5% per trade on your original capital... not the leveraged amount! E.g. Some firms let you trade FX using 0.5% margin (i.e. leveraged 200x). Risk 1.5% of the leveraged amount and see how you go

Using leverage won't result in you needing smaller capital. It will result in you being able to hold more positions than otherwise possible.

pavilion103 · 24 February 2011

skc said:
You risk 1.5% per trade on your original capital... not the leveraged amount! E.g. Some firms let you trade FX using 0.5% margin (i.e. leveraged 200x). Risk 1.5% of the leveraged amount and see how you go

Using leverage won't result in you needing smaller capital. It will result in you being able to hold more positions than otherwise possible.

Yeh that is what I meant. Sorry if I wasn't clear. I'm trying to say in the scenario that each position remains at 1.5% of my own capital.

So the main benefit is being able to hold more positions?
Following scenario (assume all Traders trade with 1.5% of their starting capital, have 330 entry alerts over a set period of time and use the exact same system with positive expectancy of 1.05 )

Trader 1 - $50,000 (leaveraged to $500,000) = $750 risk per trade, maximum positions taken 330 (could have taken up to 660 if there were more signals), profit = $12,375

Trader 2 - $50,000 = $750 risk per trade, maximum positions taken 66, profit = $2,475

Trader 3 - $100,000 = $1,500 risk per trade, maximum positions taken 66, profit = $4,950

Trader 4 - $200,000 = $3,000 risk per trade, maximum positions taken 66, profit = $9,900

Obviously this excludes interest, commission, fees, tax etc... but as a very general example is this how it would work?

So potentially a trader with $50,000 leveraged in this example could make more than a trader with $200,000 (not leveraged)?

pixel · 24 February 2011

Tysonboss1 said:
Simply, if you invest $10,000 and earn 10% you make $1,000,

If you use your $10,000 as a deposit and loan $90,000, and earn 10% on your total investment of $100,000 you make $10,000. So by using you leverage you have turned a 10% investment profit into a 100% return on your invested cash.

However, I know you didn't want to talk about risks, but you have to understand that it things went just 10% the opposite way, you will have suffered a 100% loss on your invested cash, plus the cost of interest.

worse: at 10-fpld leverage, you can lose ten times your capital because you cannot control at what level you manage to get off.
Take today's example of RDR: Assume you bought 100,000 RDR a few days ago at 70c: $7,000 of your own money leveraged up to $70,000. Then it went into a trading halt and was suspended before re-upening at 60.5c! Quicker than you could say "What the hell happened?" will your friendly facilitator ask for additional margin - $9,500 worth of it. And if you had an automatic stop ;oss in place, that would've been exercised at the re-open or a few minutes later with the same result. TANSTAAFL
The alternative: You leave enough uninvested cash in your account to cover such eventualities, But that only means youhave to keep the 90% margin - might as well use your own money...

pavilion103 · 24 February 2011

In my example above please note that I am also not taking into account share prices rising and falling and having some cash as a safeguard left in the account. Just a basic example.

tech/a · 24 February 2011

Most people Dont know how to use leverage correctly.

Radge showed me.

Lets say you have a 50K account and you are trading 10 stocks in your portfolio.
You have 5 positions of say 5K each and you see a great opportunity come up
Joe Bloggs Enterprises.
Your risk is 1.5% of your $50K or $750
The stock is trading at $8.95 and your stop on this amazing trade is
15c away so you can buy 5000 shares problem is you dont have $45K
But wait!!!!!
You can use leverage buy all the shares and not increase your risk!

There you go PROPER use of leverage.

tothemax6 · 24 February 2011

Playing with a demo forex account would be good education for you. In forex, basically, the amount of money you have deposited in the account is 'how much you are allowed to lose'. Other than that, nothing changes. You still size your positions and place your stops based on how much you are willing to lose on the trade. The only difference is that the size of your position is not limited by the money you deposit - all the money being used is effectively borrowed money.

So if you are limiting your trades to a % loss of your money, using stops, the only difference leverage makes is how tight you must place your stops.

pavilion103 · 10 March 2011

I have a question about trading shares and CFDs at the same time.

If I am scanning the All Ords with over 2,000 companies in it yet my CFD provider only offers around 300 CFDs, then there are going to be some companies that I can't trade on the CFD platform.
I am only trading CFDs because of the leverage and ability to enter more positions, not to take more risk.

Would it make sense to have a strategy where I am trading CFDs if my filter comes up with one of the 300 or so companies offered by my provider and then just trade the shares of any of the other 1,700 companies which show up in my exploration filter?

Is this something that is discouraged? or is it ok?

tech/a · 12 March 2011

You can do that.

burglar · 12 March 2011

pixel said:
... - might as well use your own money...

Hi Pixel,
Always enjoy your posts!
But this one, you took me for a long walk and ended up right back at the start.

tech/a · 12 March 2011

burglar said:
Hi Pixel,
Always enjoy your posts!
But this one, you took me for a long walk and ended up right back at the start.

Yeh but if you actually know how to use leverage properly the your way way way past the start

tech/a said:
Most people Dont know how to use leverage correctly.

Radge showed me.

Lets say you have a 50K account and you are trading 10 stocks in your portfolio.
You have 5 positions of say 5K each and you see a great opportunity come up
Joe Bloggs Enterprises.
Your risk is 1.5% of your $50K or $750
The stock is trading at $8.95 and your stop on this amazing trade is
15c away so you can buy 5000 shares problem is you dont have $45K
But wait!!!!!
You can use leverage buy all the shares and not increase your risk!

There you go PROPER use of leverage.

Didn't you read this Burglar---or was it an understanding thing?

burglar · 12 March 2011

tech/a said:
Yeh but if you actually know how to use leverage properly the your way way way past the start

Didn't you read this Burglar---or was it an understanding thing?

Enjoy your posts too, tech/a!
Understood at a basic level, what you said here.
Because of stop-loss your not risking all $45K, but only a small portion of what you borrow.

tech/a · 12 March 2011

burglar said:
Enjoy your posts too, tech/a!
Understood at a basic level, what you said here.
Because of stop-loss your not risking all $45K, but only a small portion of what you borrow.

None of what you borrow nada zippo nothing.
Your risk is the same as without leverage (Barring gaps and slippage).

burglar · 12 March 2011

tech/a said:
None of what you borrow nada zippo nothing.
Your risk is the same as without leverage (Barring gaps and slippage).

The risk is to your portfolio, not to your trade?

tech/a · 12 March 2011

burglar said:
The risk is to your portfolio, not to your trade?

How?
Educate me

burglar · 12 March 2011

tech/a said:
How?
Educate me

I cannot,
You is smarter than me!

Ok, here is my best guess!
You borrow money and buy.

If, and only if it stops out:

The difference needs to come from somewhere, ...
You stated it does not come from the trade, ...
Ok, I'm thinking the other place it may come from is the portfolio.

Lone Wolf · 12 March 2011

Using leverage to increase the number of open positions creates extra risk to the portfolio by the simple fact that you have more positions open at the same time. Risk per trade might be 1.5% of your portfolio. But the risk to the portfolio is 1.5% multiplied by the number of open positions.

Is this what you're referring to Burglar?

Lone Wolf · 12 March 2011

Lone Wolf said:
But the risk to the portfolio is 1.5% multiplied by the number of open positions.

Oops, possible definition error. I should have said that risk to your capital is the risk per trade multiplied by the number of open positions.

Do people consider a portfolio to include cash, or is a portfolio just made up of the held stocks?

burglar · 12 March 2011

Lone Wolf said:
...
Is this what you're referring to Burglar?

I don't know. I am playing catch up.
tech/a is really smart and has helped me a lot.

I need to learn something about leverage.
Even if I never have the guts to use it.
(I have already abused it.)

Eventually I will need to learn how to trade in a falling market.

And sooner or later I will have to self manage my Super.

Yeah, well, that's it at the moment.

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