ts leverage consistency
TRANSCRIPT
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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
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2
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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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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!
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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
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• [email protected] can’t wait to hear them
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