The benefits of leverage

Lone Wolf said:

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?

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No no no
You don't use leverage to increase number of trades
Read what I've written
It's as clear as ever that the larger majority who use leverage have no idea how to!!
No wonder 5% succeed
If anyone is contemplating using averaged instrument for gods sake learn how to use it without exposure to catastrophic risk.

tech/a said:

No no no
You don't use leverage to increase number of trades
Read what I've written

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Why would you say that? Leverage is used to increase the number of positions you can hold at any one time. You even say so in your example.

tech/a said:

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!

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In your example you have 5 trades going and can't afford to take on a 6th. So you use leverage to enable you to take that 6th trade.

What I did miss was the part where you said your plan enables you to take 10 trades at a time. So assuming you took 10 trades with a 1.5% stop. If all trades take a dive you only lose a maximum of 15%. That's the important part, be aware of your maximum risk tolerance and don't use leverage to expose your capital to more risk than you deem acceptable.

Lone Wolf said:

Why would you say that? Leverage is used to increase the number of positions you can hold at any one time. You even say so in your example.



In your example you have 5 trades going and can't afford to take on a 6th. So you use leverage to enable you to take that 6th trade.

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My my --- In the example I'm saying you can take the trade with no more risk BUT you can have more SHARES. Take special note of the position sizing example shown. Your NOT taking on MORE positions just SHARES with the SAME risk as UN LEVERAGED.

What I did miss was the part where you said your plan enables you to take 10 trades at a time. So assuming you took 10 trades with a 1.5% stop. If all trades take a dive you only lose a maximum of 15%. That's the important part, be aware of your maximum risk tolerance and don't use leverage to expose your capital to more risk than you deem acceptable.

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In the example above I used 10 as a portfolio sizing for ease of calculation it could be any portfolio size. Yes your right your "HEAT" in this case of 1.5% is 15%.

What doesn't seem to be getting through is using leverage WITHOUT increasing RISK exposure.

Most just use it as a bank loan and INCREASE risk exposure to the tune of the leverage available---WRONG!

tech/a said:

What doesn't seem to be getting through is using leverage WITHOUT increasing RISK exposure.

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I get that. I admit that I was taking your statements exactly as you wrote them rather than putting them in the context of your example.

Total capital risk is limited to 10 positions at 1.5% risk each. On a 50K account your lack of capital would possibly limit you to less than 10 positions. Using leverage you can increase the number of positions held to 10 regardless of how much each position costs.

The only additional risk then comes from slippage/gaps. In your example Joe Bloggs Enterprises cost you 45K. What are the chances JBE will collapse tomorrow leaving you with a big loan and worthless shares? It would destroy your account.

Lone Wolf said:

I get that. I admit that I was taking your statements exactly as you wrote them rather than putting them in the context of your example.

Total capital risk is limited to 10 positions at 1.5% risk each. On a 50K account your lack of capital would possibly limit you to less than 10 positions. Using leverage you can increase the number of positions held to 10 regardless of how much each position costs.

The only additional risk then comes from slippage/gaps. In your example Joe Bloggs Enterprises cost you 45K. What are the chances JBE will collapse tomorrow leaving you with a big loan and worthless shares? It would destroy your account.

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Yep could happen
Not likely
But I'd day if you got one in a lifetime you'd be terribly unlucky
If you gear putters all your life you'll never move forward

tech/a said:

Yep could happen
Not likely
But I'd day if you got one in a lifetime you'd be terribly unlucky
If you gear putters all your life you'll never move forward

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My dad had 2 Global Financial Disasters and a Cardiac bypass, in his lifetime!
But he don't care, he is still alive.

Getting back on topic, would not a frugal trader have a contingency fund for black swan events.

burglar said:

... would not a frugal trader have a contingency fund for black swan events.

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What about insurance!

Simply you don't place yourself in a position where a catastrophic loss could wipe you out

burglar said:

My dad had 2 Global Financial Disasters and a Cardiac bypass, in his lifetime!
But he don't care, he is still alive.

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So did mine... and he is retired at the beach drinking coffee every day content, just not as wealthy.

No matter how many wins you have and no matter how large they are, multiplying any string of numbers no matter how large with one zero, gives you zero.
Bad stuff happens way more often than anyone thinks (fat tails). 1 in 100 year floods happen every 30 years, to give a recent example. The number of major market crashes is way larger than almost all models suggest.

When you use leverage you increase your risk. There are no if or buts about that. The more money you have exposed to any market the greater your risk. If someone really believes they have the answer to increased returns without increased risk then heck they should go see GS and get paid seven figures, which is a geat reward for no risk!

Saying that I am a fan of intelligently used leverage. I can't speak to day trading, but as a long term investor there are times when the market is clearly cheap and times when it is clearly expensive, those times are rare and most of the time the market is neither. When it is clearly inexpensive then the time to use leverage is upon you, at that time most people will be selling and headlines will be terrible. When the headlines are great then it's time to raise cash. There may be good examples of using leverage in day trading, I'll have to leave that to others.

Circling back to the string of large numbers and a zero. Jesse Livermore and Donald Trump are both great examples of that, at the same time they show you that if you're not afraid of going bankrupt that the excessive risk along the way can be fun and give you a lifestyle you may seek.

YMMV.

tech/a said:

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

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Ok I get it now!