High leverage: Not a good idea

I continually run into Traders and Fund Managers that require high leverage in order to carry out their activity. We can establish “high leverage” as all those above 100: 1

In this article I will explain why trading with high leverage or developing the trading strategy based on this leverage is not a good idea, since it will not get very far.

When a Trader or Fund Manager develops his strategy, it is assumed that he develops it with the objective of making it as profitable and consistent as possible, with the idea of increasing the capital under management and thus being able to access better services providers, better execution, more transparency and the elimination of possible conflicts of interest with his liquidity providers.

Well, throughout this process, he will realize that high leverage is a simple illusion, a bait used by retail brokers to attract their customers, but that in the institutional world does not exist as such. Prime Brokers or PoP Brokers, which are the liquidity providers of retail brokers, do not offer leverage above 100:1, usually 50:1 or even 25:1 or 10:1. What does this mean? Basically, every broker offering a leverage above 100:1 is taking the counterpart to the trades, directly or indirectly, which causes a great conflict of interest that will generate great problems in the long term, especially if the strategy is winning and capital under management are considerable sums.

The problem of developing the strategy based on high leverage comes because it greatly limits the capacity for growth, as well as its ability to improve the service providers which it works with. The need for a high leverage to develop his activity, condemns him to be a retail Trader or retail Fund Manager  for the rest of his days. He will be forced to remain playing in the yard with the children, instead of being able to go up and sit at the table with the professionals, worth the comparison.

It is because of all this, that I always recommend my clients not to use high leverage when developing their trading strategy, especially if they have business growth expectations. Otherwise, they will reach a point where they will realize that this strategy is no longer viable and will have to either change strategy, with all the work that entails, or optimize the current strategy to be able to work with normal leverage, in the event that this is even possible.

When developing a trading system or strategy, it must be done taking into account not only the current situation of the business, but also the future expectations we have of the business being developed. This way we will avoid unpleasant future surprises that can throw away the effort made for many years.

If you have any questions or want to find out more detailed information in this regard, do not hesitate to contact me directly, I will be happy to answer your questions and share my knowledge and experience with you.

Cheers