ts leverage consistency

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Lc Badge

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Why consistent leverage (Lc) is investable (1/2)

• Successfully trading capital with leverage requires 2 skills:

1. Timing : entering the right asset, at the right time, in the right direction,

exiting when maximum profit for the pattern has played out

2. Risk/return Management: leverage can amplify timing returns (positive

AND negative!!) to meet any personal risk appetite

• Timing skill is valuable to investors (aka “investable”): very few traders

find/code tradable patterns faster than all other humans and algorithms in the

market

• However, there is no such thing as leverage “skill”:

• No trader can be 100% certain (do sustained 100% win-ratios exist?) of

the outcome of a trade when opening it - which is when leverage is set

• What, then, justifies changing leverage across positions?

• The best that traders can deliver is leverage that consistently amplifies the

returns from timing skill to suit a declared risk-appetite choice

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Why consistent leverage (Lc) is investable (2/2)

• Pretending otherwise and changing leverage (i.e. inconsistent leverage)

introduces a random component (i.e. luck!) on top of a strategy’s timing return :

• Badly timed strategies can display random profits through leverage

changes - profits accrue through luck! (more leverage on winning than

on losing trades)

• (The flip-side also applies: inconsistent leverage can make a well-timed

strategy unprofitable! – leading talented traders with bad risk

management to abandon good strategies for the wrong reason!)

• Inconsistent leverage is NOT investable:

• It puts the source of profits into question: is it timing (good!) or just lucky

leverage (bad!)?

• Inconsistent leverage is a warning flag for bad risk management – what

happens to investors when a highly leveraged gamble goes bad?

• Strategies with consistent leverage PROVE risk management skill – are at

least trustworthy and likely investable, if all other TS elements are investable

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INDEX

1. UNDERSTANDING LC

2. IMPROVING ON LC

3. QUESTIONS?

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Badges represent progression in colors

• Yellow = Lowest achievement

• Magenta = Highest achievement

This strategy displays 6.8/10 Lc

• Shown by number in progress bar

Progress within magenta is displayed in the

circular progress indicator around the badge

itself

Click on to see a detailed description of

the level you are in

Understanding Lc – Lc Badge

Your Lc level is displayed under Trader -> Challenge

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2

3

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2

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4

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Check the percentile of the traders

in the community for this badge!

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TS Leverage – comparable across assets / strategies

TS Leverage means: multiples of (market average) 1:1 EUR/USD volatility

Different assets have different volatility/risk!

• 1 month volatility for various assets:

• EUR/USD: 2.21%

• USD/CAD: 1.66%

• GBP/JPY: 3.31%

• Nominal volatility is a bad proxy for risk

• Composite trades: for positions

involving multiple assets, nominal

leverage is meaningless

• Single asset trades: 1:1 leverage

GBP/JPY trade is 2 times riskier

than 1:1 USD/CAD

Position TS Leverage Comment

1:1 EUR/USD

(long or short)≈1

The average volatility of the

EUR/USD is the anchor

4:1 EUR/USD 44 times as risky as the

anchor!

1:1 GBP/JPY 2.5

Pound/Yen historically 2.5

times as volatile as

EUR/USD

20:1 EUR/USD

(Long) &

30:1 JPY/GBP

(Short)

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Our algorithms work out

how risky this trade is in

multiples of 1:1 EUR/RISK!

TS Leverage: compares volatility of a trade/strategy with average EUR/USD volatility

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Understanding Lc – Lc Chart (1/2)

Your Lc Chart is available under Trader -> Challenge

TS

Le

ve

rag

e, (m

ultip

les o

f 1

:1 E

UR

:US

D r

isk)

Green: winning positions

Red: losing positions

All data refer to chosen period in timeline (21

trading days)

Max / Min TS Leverage in selected period of 21

trading days

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Understanding Lc – Lc Chart (2/2)

The strategy’s TS Leverage Target TS Leverage Target and VaR for Jun 23rd 2013

• TS Leverage Target =

Leverage to be chosen in

all positions on a given day

to keep your Risk stable

(e.g. 80.8% in this specific

case)

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Lc Example – Consistent leverage!

Most positions in min/max range!

Short positions outside target range penalize little

The bigger the deviation, the bigger the penalty

The lower chart tracks total deviation from target: low & smooth = good!

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Lc Example – Inconsistent leverage!

Most positions outside min/max range!

Deviations from target in long positions penalize

the most!

The lower chart tracks deviation from target: spikes = bad!

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Want more examples?

Visit the TS Leaderboard to see Lc for other strategies

By using the filter functionality! Filter by TS Elements!

Sort by TS L. Consistency

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2

Review the strategy!

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Visit the Trading Journal!

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3 Define timeframe

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INDEX

1. UNDERSTANDING LC

2. IMPROVING LC

3. QUESTIONS?

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Improving Lc (1)

TS Leverage Target for a given day: TS Leverage Target = Leverage to be

chosen in all positions on a given day to keep your Risk stable (i.e. same VaR as

the day before, 80,8% in this example).

• All the positions opened on Jun 23rd 2013

should be in the region of the TS Leverage

target for such date (i.e. 24.34) - otherwise

your score will be penalized!

Note: the longer the duration of your trade,

the closer you should keep to the TS

Leverage Target!

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Improving Lc (2)

If you do not like your current Risk, change your leverage using the following

formula:

The Desired Target Leverage for the example above would be ≈ 9.04

Note: Should you decide to change your risk, make sure you do it progressively – otherwise

your Rs and Lc will be penalized!

Desired Target Leverage = (Target VaR / Current VaR target ) * Leverage Lc

E.g., to reduce your Risk (from VaR of 80.8% to 30%), the formula would read as

follows:

Desired Target Leverage = (30/ 80.8) * 24.34

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Coming soon: Money Manager!

• Your Lc chart will soon be more

than a diagnostic tool!

• For traders who report their live

trading, Money Manager will

provide, real time:

• Current leverage

• Nominal required to open

new trades on target TS

Leverage

• Nominal required to

modify existing trades

within target TS

Leverage

• Do contact us if you want to be

part of the Beta program for

Money Manager!

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Remember – timing helps, leverage doesn’t!

• Your leverage target is a personal choice, driven by

• Personal risk appetite: how quickly do you want to grow your capital?

• Skill: can your “gut” handle the loss aversion that leverage will trigger?

If in doubt, always trade with less leverage than you can handle!

• Your leverage choices drive how quickly your strategy grows YOUR CAPITAL

• At best, leverage grows your personal capital more quickly

• At worst, it ruins good timing by introducing loss-aversion (see La

Badge), wiping your equity (margin calls), or being fooled by

randomness (lucky/unlucky leverage gambles, as discussed)

• ONCE you deliver consistent leverage, the speed at which your capital grows is

IRRELEVANT to yours investors – they’ll choose for timing skill ONLY -

• If you trade with consistent leverage, investors can adjust their

leverage to a fraction/multiple of yours that suits their risk appetite,

• If your leverage is not consistent… they probably won’t invest!

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INDEX

1. UNDERSTANDING LC

2. IMPROVING LC

3. QUESTIONS?

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Questions?

Trading is hard – no wonder there are unanswered questions!

(Why not, together, build a Knowledge Base that answers them all?)

• The Knowledge Base contains TS Mentors’

answers to all your questions!

• Mentors are Traders like you who

enjoy helping out, and are voted

very good at it, AND

• Trading educators hand-picked for

quality and broker independence,

who pitch their materials

• Want to contribute? Great!

• Post an article / Post

• Ask or answer questions

• Rate fellow traders’ contributions

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Can you do better?

• This article is a “stub” (an unfinished entry that MUST be improved)

• We need your questions & feedback to improve it!

• Feel free to post your questions to the TS Knowledge Base

• Have suggestions?

• theowl@tradeslide.com can’t wait to hear them

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(even questions do!) – helping out will reflect on your community standing, which means

• More traders will visit the URL on your profile

• When they visit, they’ll request your mentoring!

• If they do it enough, we’ll offer invitations to you