Traders' Roundtable

I have noticed that there are diminishing returns when increasing leverage. Conceptually, if you employ 100% of equity, and then 200%, it would stand to reason all performance metrics would double, but that is not the case. Before I go on a solitary, multi-day excursion searching for the relationships which cause this observation, I was hoping someone can get me started in the right direction, or even explain why this is the case!

Be kind, don't make me look too stupid!

If you are talking stocks, cost of margin would be one component.

Does that explain the entire difference? Has anyone checked into this?

Anyway, in my example, I was using futures and simply multiplying my initial bet size * 2. The relationship is not linear, and the incremental return is less than 2x. I have earn interest turned off.

Are you getting the same number of trades on each run? Available margin and volume considerations may be coming into effect.

I have disabled volume and margin.

The Kelly formula shows the optimal bet size for the system to be 26%, for each individual market that would be a certain death strategy. However, I do find optimal total portfolio risk to be in that general area.

I assume the reason is when you cross the optimal threshold, overcoming drawdowns becomes increasingly difficult. If anyone has more insights, I would love to hear them.

Maybe the system experiment supplied in THIS thread, and the associated graph, might be what you're looking for.