Leverage Comparison

In the beginning there was high leverage of about 500:1 available for trading and investing. Then ASIC got involved and as from March 2021 leverage dropped to about 30:1. I suspect this was to legislate to stop uneducated people from losing money.

On 17Aug2021 I had two accounts, one with CMC offering 30:1 leverage containing ‘example trades’ which I share in my courses. It had a balance of $650 AUD. The other account was a ‘high leverage’ account offering (up to) 2000:1 with a balance of $500 USD in which I use KATS, my automated trading software.

I was interested in doing a (rough) leverage comparison, so I set long trades in both accounts on the S&P 500 and NASDAQ. These two markets had been outperforming the Dow, although all my analysis was still being done on the Dow. These three markets share commonality.

The second 6 week low of the 20 week cycle was due in a very narrow high probability window centred on Thursday 19 August 2021 (see vertical dashed lines below).

Here is what I was looking at on Tuesday 10 August 2021

Here is what I was looking at on Tuesday 17 August 2021

Notice the Dow made new all-time highs on this day – and I was looking for a 6 week low!

Then the plunge happened over the next three days. The plunge was confirmation the 6 week low was forming, so I started setting long on the Daily timeframe in both accounts.

I also added a high leverage hourly chart for the S&P 500 and NASDAQ and switched KATS on long on each. The concept here was to get 3 or 4 extra trades on the bounce out – but close to the low. Pullbacks tend to occur on the intraday timeframes, whereas, often there is no pullback on the daily, even after 5 or 10 days. My entry and stop loss methodology require pullbacks.

This strategy worked. However, because there were additional (hourly) trades open in the high leverage account, the leverage comparison is skewed. KATS caught the hourly pullbacks, whereas this was very difficult to do manually in the CMC account

You can see the plunge and bounce on this Dow screenshot

About 80% of available margin was used up in the 30:1 account, whereas only about 10% of available margin was used up in the 2000:1 account. Despite the lack of margin in the 30:1 account, I progressively added 3 long trades on AUDUSD on the bounce out of the 18 month low 20 August 2021. This has certainly bolstered the 30:1 account profit, but has further sullied the leverage comparison.

The lack of available margin tends to restrict taking further opportunities.

23 August 2021 Screenshots

31 August 2021 Screenshots

3 September 2021 Screenshots

Tightening Take Profit Stops

I assessed the 20 week high was either in or very close, so I tightened trailing stops on all positions.

4 September 2021 Screenshots – Prior to Exit

Exiting Positions

I did not want to accept the risk of holding positions across the weekend (Saturday 4Sep ACST was Friday in the USA), so all high leverage positions were closed.

4 September 2021 Screenshots – After Exit

Leverage Comparisons and Analysis

The spreadsheet shows two colours differentiating between 30:1 leverage and 2000:1 leverage.

The leverage comparison started on 17 August and ended 18 calendar days later on 4 September.

Percent Change in Balance from Initial Capital per Days in Trade

High leverage is a double edged sword! LOOK at the 87.4% drawdown ($437USD loss). This occurred because I was not careful enough and got into a market that didn’t trade 24 hours a day. The margin was large, I couldn’t get out, but when I did my stops were gapped. OUCH! However, I had confidence in my phasing, so my sphincter was not exercised. No puckering what so ever! It was TIME for a low and so I just immediately added $1,000AUD (~$700USD) and focussed on trading SP500 and ND100.

Recovering from a large loss is extremely difficult in a low leverage account.

If I understand Hurst correctly, he would have exited at about the 60% level after 7 days in the trade, and would have moved to other market(s) ready to rock and roll. In my case, I didn’t have other markets ready to move more substantially than SP500 and ND100. I knew the AUDUSD 18 month low was due, but did not expect it’s bounce to be very substantial. I got that move in the CMC account but not in the high leverage account.

Percent Change from Invested Capital on a day by day basis

High Leverage

A high rate of change in balance (60.7% per day) occurred at 7 days into the trade at a balance of $6300. That was then surpassed at 64.5% per day at 14 days at a balance of $12039. The highest dollar balance of $12250 occurred at exit on day 18. I like a high rate of return but I prefer the MONEY!

Low Leverage

It is important to note the highest rate of change in balance (3.1% per day) occurred at 6 days into the trade at a balance of $769. The highest dollar balance of $890 occurred on day 17 and at exit on day 18. These figures are still impressive if you compare them to bank interest!!!

Balance ($) Change from Invested Capital on a day by day basis

Can I do this all the time? Of course not! I have to wait for the lows. Do my trading results always look this good? Of course not! They sometimes look better…