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

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Young Ho Seo
15867
Young Ho Seo 2014.01.18 22:34 

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
Moderator
30742
Alain Verleyen 2014.01.18 22:49  
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
15867
Young Ho Seo 2014.01.18 23:26  
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.

How to Calculate a Margin Closeout in Forex | OANDA fxTrade Europe
How to Calculate a Margin Closeout in Forex | OANDA fxTrade Europe
  • fxtrade.oanda.co.uk
To ensure you can cover any losses you might incur on your positions, OANDA requires sufficient collateral. This collateral is typically referred to as margin. Why are Margin Calculations Important? As a trader, you are often faced with the following questions: How much margin do I have available? What is the largest trade I can make given...
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