I remember doing something like that in 1987. Monday morning, maybe it was 19 October 1987, I figured prices were already about as low as they were going to go so I bought lots of stock about 2 hours into the trading session. Then the Dow Jones Industrial Average value decreased about 20 % that afternoon. Long term I actually profited from the exercise. I remember holding some stocks about a year. I recall some of my stock holdings decreased in price and never recovered. Some companies disappeared from the exchange listing. But overall I recall making a profit. I remember the volatility was difficult for me to live with. Those were very volatile times. I don't trade that way now. I learned my lesson. Keep bets small. Wait for prices to increase before buying. I don't try to be a trading superhero. It seems to be working. Survival is important to me. <img src=http://www.cartoonstock.com/lowres/mba0131l.jpg \img> I enjoy being afraid. My fear helps me survive.
Here is what is in the spreadsheet in a nutshell. Implementing a stop loss will require a different analysis: I don't believe though it will make the approach ultimately very profitable. You can't just look at average annual. The real test is the compounded, because of the drawdowns. Code: Ratio over Prior yr BUY&HOLD FUTURES LEVERAGE / ONE- YEAR RETURN % FUTURES LEVERAGE / CUMMULATIVE COMPOUNDED % Year End SPY 1 2 3 4 9 20 1 2 3 4 9 20 2006 140.46 1.15 2.20 12.21 24.41 3.00 48.83 109.86 244.13 1.66 1.94 1.07 0.10 -27.70 -171955.83 2005 121.92 1.05 1.91 1.83 3.66 5.50 7.33 16.49 36.65 1.48 1.56 1.04 0.07 -13.20 -49967.72 2004 116.30 1.11 1.83 7.70 15.40 23.10 30.79 69.29 153.97 1.45 1.51 0.99 0.07 -11.33 -36567.11 2003 105.06 1.28 1.65 25.17 50.34 75.51 100.68 226.52 503.38 1.35 1.31 0.80 0.05 -6.69 -14398.03 2002 81.97 0.78 1.29 -24.58 -49.16 -73.75 -98.33 -221.24 -491.65 1.08 0.87 0.46 0.02 -2.05 -2386.24 2001 104.53 0.88 1.64 -15.06 -30.11 -45.17 -60.22 -135.51 -301.12 1.43 1.71 1.74 1.48 1.69 609.28 2000 118.86 0.90 1.87 -12.78 -25.55 -38.33 -51.11 -114.99 -255.54 1.68 2.44 3.18 3.73 -4.76 -302.94 1999 131.74 1.20 2.07 17.37 34.73 52.10 69.46 156.29 347.31 1.92 3.28 5.16 7.62 31.77 194.77 1998 109.45 1.29 1.72 25.66 51.32 76.98 102.64 230.93 513.18 1.64 2.44 3.39 4.50 12.40 43.54 1997 85.07 1.34 1.34 30.51 61.01 91.52 122.02 274.55 610.12 1.31 1.61 1.92 2.22 3.75 7.10 1996 63.72 1.00 1.00 1.00 1.00 1.00 1.00 1.10 AVE. ANNUAL % 6.80 13.60 17.04 27.21 61.22 136.04 COMP. ANNUAL% 5.18 6.87 0.72 -20.27 #NUM! #NUM! Buy and Hold index returned average annual of 10%, or compounded annual of 8.2% Futures with 1:1 leverage returned average annual of 6.80%, compounded 5.18% Futures with 2:1 leverage returned average annual of 13.60%, compounded 6.87% Futures with 3:1 leverage returned average annual of 17.04%, compounded 0.72% Futures with 4:1 leverage returned average annual of 27.21%, compounded -20.27% Futures with 9:1 leverage returned average annual of 61.22%, compounded ??? (would be wiped out before the end) Futures with 20:1 leverage returned average annual of 136.04%, compounded ??? (would be wiped out before the end) Assumed interest rate of 3% per annum throughout the period Purchases are made at the end of each year and held till the end of the following year.
One flaw in the logic is that you're really investing $200k instead of the stated $100k. You're holding $100k in reserve to meet margin calls, so that should be counted as the capital invested. Why? Because futures brokers don't give you 3 days to put up money like stock brokers do. IB, TS, or any other broker will sell down your position the same day if you fall below the overnight maintenance margin. They understand leverage, and don't want to be stuck holding the losses if a trader becomes insolvent. This means you will have to front the capital on the same day, which more or less means you have to keep it tied up ready to meet margin calls. Therefore, the $100k in reserve might as well be counted as the committed capital. So $65k/$200k = more like a 32.5% theoretical return. If you're holding $300k in reserve, then the committed capital is in effect $400k, and your theoretical return is more like 16%.