Does Profit suppose to be proportional to Leverage assuming you have profitable trading system?

[Young Ho Seo]

I don't understand my back testing result for some of my trading system. It does not matter what leverage I choose on my strategy tester I still get the same profit. Is it correct?

This is when I set up leveage 1:500 using 0.1 fixed lot with initial capital 1000 GBP on the strategy tester. The final profit is 1957.36 and relative drawdown of 13.10%.

 

 

 

 This is when I set up leveage 1:100 using 0.1 fixed lot with initial capital 1000 GBP on the strategy tester. The final profit is 1957.36 and relative drawdown of 13.10%.

 

 

Both graph looks exactly the same. According to the two graphs, the chosen leverage does not have any effect on profit or drawdown. Even the leverage 1:20 would have the exactly same graph as above. Is it suppose to be true? I am not quite clear with this. So what is signifance about the leverage?

[Alain Verleyen]

FinanceEngineer:

I don't understand my back testing result for some of my trading system. It does not matter what leverage I choose on my strategy tester I still get the same profit. Is it correct?

This is when I set up leveage 1:500 using 0.1 fixed lot with initial capital 1000 GBP on the strategy tester. The final profit is 1957.36 and relative drawdown of 13.10%.

 

 

 

 This is when I set up leveage 1:100 using 0.1 fixed lot with initial capital 1000 GBP on the strategy tester. The final profit is 1957.36 and relative drawdown of 13.10%.

 

 

Both graph looks exactly the same. According to the two graphs, the chosen leverage does not have any effect on profit or drawdown. Even the leverage 1:20 would have the exactly same graph as above. Is it suppose to be true? I am not quite clear with this. So what is signifance about the leverage?

If your lot is fixed, then leverage doesn't have influence on your profit. Leverage have influence on your stopout risk, you can see that on the charts you posted. The part in the bottom shows your margin level, as you see the values for leverage 1:100 are approximatively 5 times lesser. You are still far away from stopout (around 100% of margin level) but you are a lot closer with leverage 1:100 than with 1:500.

High leverage can be dangerous if used inappropriately. For example if you base your lot on margin level, instead of fixed 0.1 lot you can get 0.5 (or maybe 0.4 ...) with 1:500 leverage. In this case your profit will grow but your drawdown also, and become very dangerous for your account.

[Young Ho Seo]

angevoyageur:

If your fixed lot is fixed, then leverage doesn't have influence on your profit. Leverage have influence on your stopout risk, you can see that on the charts you posted. The part in the bottom shows your margin level, as you see the values for leverage 1:100 are approximatively 5 times lesser. You are still far away from stopout (around 100% of margin level) but you are a lot closer with leverage 1:100 than with 1:500.

High leverage can be dangerous if used inappropriately. For example if you base your lot on margin level, instead of fixed 0.1 lot you can get 0.5 (or maybe 0.4 ...) with 1:500 leverage. In this case your profit will grow but your drawdown also, and become very dangerous for your account.

I got the following formula from http://fxtrade.oanda.co.uk/help/how-to-calculate-margin-call#mc_cal_margin_used and http://www.investorwords.com/18348/margin_level.html websites.

Margin level = ( Equity / Used Margin ) x 100.

Margin Used = Value of all Positions multiplied by the margin requirement (margin requirement = 0.2 for 1:5 leverage, 0.1 for 1:10 leverage, 0.01 for 1:100 leverage and 0.002 for 1:500 margin)

According to these formula, more open positions in one's trading the margin level gets smaller and smaller.

 

equity	Used margin	Margin level
1000	100	1000.00
1000	200	500.00
1000	300	333.33
1000	400	250.00
1000	500	200.00
1000	600	166.67
1000	700	142.86
1000	800	125.00
1000	900	111.11
1000	950	105.26
1000	960	104.17
1000	970	103.09
1000	980	102.04
1000	990	101.01
1000	995	100.50
1000	996	100.40
1000	997	100.30
1000	998	100.20

 

It seems that margin level should be controlled in one's trading for proper risk management. However a lot of people actually concern drawdown more than margin level. To me it makes more sense to use the margin level adjusted drawdown for risk measure as from my two graphs different leverage does not have any effect on drawdown.