# 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


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## 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.
> ...




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.


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## 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.
> ...




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.


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## 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)?


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## 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...


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## 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.


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## 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.


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## 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.


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## 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?


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## tech/a (12 March 2011)

You can do that.


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## 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.


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## 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.
> 
> ...




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


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## 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.


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## 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).


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## 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?


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## tech/a (12 March 2011)

burglar said:


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




How?
Educate me


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## 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.


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## 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?


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## 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?


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## 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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## tech/a (12 March 2011)

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?




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.*


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## Lone Wolf (13 March 2011)

tech/a said:


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




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
> ...




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.


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## tech/a (13 March 2011)

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.




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.




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!*


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## Lone Wolf (13 March 2011)

tech/a said:


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




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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## tech/a (13 March 2011)

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.




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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## burglar (13 March 2011)

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




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.


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## burglar (14 March 2011)

burglar said:


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




What about insurance!


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## tech/a (14 March 2011)

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


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## toocool (14 March 2011)

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.





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


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## moreld (14 March 2011)

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.


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## burglar (22 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).




Ok I get it now!


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