Extreme Leverage

Discussion in 'Trading' started by Lucias, Feb 22, 2011.

  1. Lucias


    I'm experimenting with the concept of extreme leverage. Based on available evidence, a return of 30% with a risk adjusted return of 1:1 risk/reward factor (return/max dd) would put one among the best of the traders. I think on a long term basis that these are solid and non trivial goals. Basically, among people who have to report what they really do, these returns are near the top of the winner's cloud.

    Many amateurs want to believe that these returns are only difficult for those with significant capital. I do not find the argument entirely convincing. Regardless, it is not a problem for us with tiny accounts.

    Most long-term professionals eschew over leveraging. Despite what I've stated and believe to be relatively true, I am starting to explore a concept that I think of as 'extreme leverage'. This unproven concept is based on some ideas I've recently started to entertain:

    1. The notional value of a position has no meaning.
    2. One can risk what one has/can make. For tiny accounts, cash flow represents a more important factor then nominal account value.
    3. Many of the most consistent edges are relatively tiny and can not be profited from without leverage.
    4. Many amateurs fail because they can't overcome the fixed fees of the business.

    People say "trading is a business" all the time. Imagine a business that is expected to require 24k to operate. Business owner A. saves 24k and then spends the money throughout the year. Business owner B. has 2k disposable income per months and decides to start the same business.

    Now let us imagine the 2k per month scenario.

    Trader A is among the best and has 100k. His goal is 30% at 1:1. He makes 30k. He is consistent and thus roughly the 30k/12 = 2.5k/month

    Trader B is among the best and has about 6k saved and has 2k/month income. Performing at exactly the same way he can theoretically make 30k = 5x return

    The only problem with trader B is he needs to trade on borrowed money to open the nominal value.

    What are possible solutions?

    A. Prop firm like Bright. Capital requirements are still very high and fixed fees are high.

    B. Futures. Possible option for intraday trading but margin is high on the overnight. Granularity is poor.

    C. Options. Complex. I don't know these but seem possible.

    D. CFD's and Spread trading. Not available for US residents.

    E. NADEX. Spreads. This is the route I'm experimenting with. The greatest problem is they don't offer weeklies.
  2. Pekelo


    Here let me help you with these Thorsen Extreme Leverage plier set:


    Pick any of them, and apply it to your nuts. Save you some money...