If you were given 5x the buying power, would you trade 5x bigger?

[d08]

Come to think of it, if you're talking about trading the same exact strategy, this would be a test whether you're simply gambling or have actual risk management. There are exceptions of course, those who trade some arbitrage strategy or certain extremely low volatility instruments.

 

[wmwmw]

It is wrong to think leverage you use is related to the leverage broker offer to you.

leverage is only related to the survival of your capital ,related to your strategy: first you need a winning strategy;then you your leverage is set at a level that guarantees the survival of your capital, and then maximize your profit.

So the leverage should suit your strategy, and doesn't change no matter how high the leverage broker offer to you.

 

[globalarbtrader]

I'm wondering what people would do in this situation.

Let's say you've proven yourself a profitable trader with around $100k equity, 4x buying power on a retail margin account = $400k (let's ignore 6x portfolio margin exists for a sec), and your live max drawdown has been about -17.5%.

Then you were magically given 5x more buying power through some deal, and now have $100k risk capital with 20x = $2,000,000 buying power that's fixed and doesn't decrease. Originally, you'd need $500k equity for that kind of buying power, but now have the opportunity to go bigger on your $100k.

You know the max drawdown increases linearly, however things like risk of ruin and amount to recover from drawdown and get back to breakeven increase at an even faster rate. But let's say you have zero emotions and a huge pair of titanium balls.

Would you trade 5x bigger position sizes and just accept the potential 5x drawdown on your original $100k and pretend it's gone?

1x

It's extremely rare that the optimal leverage is greater than what the broker offers you. So must people shouldn't be leverage constrained.

GAT

 

[SunTrader]

Magic was an NBA Allstar at one time.

Traders don't do magic.

 

[DiceAreCast]

I am surprised nobody has mentioned edge yet to answer the OP question. @d08 alluded to diversification and I completely agree, given there are opportunities to diversify into different assets and/or strategies with an edge. But sometimes that is not provided. Sometimes the only game in town is a single position or one strategy. If there is an edge then the edge determines to a large degree how much leverage should be applied. Obviously the one biggest concern is risk of ruin. But the higher the edge the lower the probability of risk of ruin holding notional size constant. And also the higher the number of subsequent losses, required, to cause bankruptcy. Leverage is a two edged sword.

 

[d08]

1x

It's extremely rare that the optimal leverage is greater than what the broker offers you. So must people shouldn't be leverage constrained.

GAT

I'd disagree somewhat. I'm often trading special margin names and the requirements are extremely strict. These typically have tighter stops and I also have the other side on to reduce market risk. Yet IB treats my positions as extremely high risk and looks at them on an individual basis (Special Margin stocks don't appear to help with PM). The assumption that ALL my positions in different names could go +/- 100% any second is a bit absurd.

Perhaps it's time brokers would treat orders received with attached stops differently from non-protected positions. Technologically this could be a headache of course.

 

[globalarbtrader]

I'd disagree somewhat. I'm often trading special margin names and the requirements are extremely strict. These typically have tighter stops and I also have the other side on to reduce market risk. Yet IB treats my positions as extremely high risk and looks at them on an individual basis (Special Margin stocks don't appear to help with PM). The assumption that ALL my positions in different names could go +/- 100% any second is a bit absurd.

Perhaps it's time brokers would treat orders received with attached stops differently from non-protected positions. Technologically this could be a headache of course.

You're the very rare case then

"The assumption that ALL my positions in different names could go +/- 100% any second is a bit absurd."

Flash crash? Although if you're long/short (which I'm inferring you are) then everything going to -100% is no biggie.

Not sure I agree with the argument about stop attached orders. Stops are of course no guarantee but I suppose you could argue someone with stops is more prudent and less likely to blow up the account.

GAT

 

[d08]

Not sure I agree with the argument about stop attached orders. Stops are of course no guarantee but I suppose you could argue someone with stops is more prudent and less likely to blow up the account.

Certainly stops are not a guarantee but for liquid instruments, they're likely to execute at around trigger prices.
But I also hold large index positions overnight, positions which I deem riskier than my single name intraday positions.

 

[destriero]

I'm wondering what people would do in this situation.

Let's say you've proven yourself a profitable trader with around $100k equity, 4x buying power on a retail margin account = $400k (let's ignore 6x portfolio margin exists for a sec), and your live max drawdown has been about -17.5%.

Then you were magically given 5x more buying power through some deal, and now have $100k risk capital with 20x = $2,000,000 buying power that's fixed and doesn't decrease. Originally, you'd need $500k equity for that kind of buying power, but now have the opportunity to go bigger on your $100k.

You know the max drawdown increases linearly, however things like risk of ruin and amount to recover from drawdown and get back to breakeven increase at an even faster rate. But let's say you have zero emotions and a huge pair of titanium balls.

Would you trade 5x bigger position sizes and just accept the potential 5x drawdown on your original $100k and pretend it's gone?

If you have an edge and you're not cap-constrained by the increase, then the only answer is "yes."

 

[longandshort]

Yes I'd lever 6x on my pairs trades (high sharpe).