19 Jul More Leverage, More Better?
More Leverage, More Better?
July 19, 2017
Last week, we talked about having a great system but not having enough margin to trade it.
So how do we get more firepower?
The easy way would be to assume a false identity, hire a private plane, file a false flight report, and open a new Forex account via a hired bodyguard in a country with increased leverage.
If that’s not possible, we’re kind of stuck.
Unless we leave Forex and go somewhere where the beer flows like wine. Where beautiful women instinctively flock like the salmon of Capistrano. I’m talking about Futures.
According to Tradestation, we can trade up to 6 full contracts (and hold them overnight) on a mere $10,000 account. They went out of their way to tell me not to do that, and I feel that’s the responsible thing to tell me.
But I’m not here to be responsible. I’m here to find out what Futures can do.
Using the Hornet daytrading robot as my testing system, I took a look at how higher leverage could boost returns. And I used the Hornet on the British Pound (@BP) futures contract.
It turns out that higher leverage is a good thing when used with stoplosses and traded reasonably.
Using the Hornet on @BP, here’s what I found.
First, no losing years:
On a $10k account (with no compounding), you get sixteen years making over 20% per year and some years 50% or higher. That’s good. And that’s using only 2 contracts per trade.
In addition, the max drawdown at that trade size is only $4,400. I say “only,” of course, knowing that a 44% drawdown would be extremely hard to take in real life. But it’s doable, especially if we could get that level of return.
It had one 24-trade winning streak and lost five times in a row (its worst streak) only one time. Overall, it traded over 1,600 times and won at a 75% clip.
But if we wanted to get crazy, futures allows us the ability to crank it up.
You can probably do that math, but I want to say it anyway. If we moved up to trading 3 contracts per trade, then, yes, our hypothetical maximum drawdown jumps up to $6,633. But our monthly return also jumps up to an average of $564.64 per month. That is an average annual return of $6,775.
I don’t need to tell you that that comes to $67,775 per year on a $100k account. That might be enough to live on. Hooray, leverage!
One final note, we spent some time recently talking about Martingale money management. For this testing of @BP, Martingale was my method. After every loss, we went in bigger–and that definitely boosted returns.
So it turns out there are places we can go where leverage is welcomed and traded among friends. But would that beautiful leverage help the Friday Only system we talked about last week?
We’ll talk about that tomorrow in the Thursday webinar.