How do good traders use leverage? – Part I

25 May 2018
The Market Bull

Good traders know that no more than between 5:1 and 10:1 D leverage is required to achieve 20% to 60% returns per annum, at 10% VaR.

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In a recent Spanish podcast episode, Darwinex CEO Juan Colón shed light on behaviours of successful DARWIN providers (traders) at Darwinex.

Insights shared were as a result of analyzing over 3,000 DARWINs worth of data from the last 3 months.

Research objectives were to identify what leverage successful traders employ, success quantified as achieving a D-Score > 65.

Note: With the latest changes to the D-Score calculation, this threshold will change to 68 in future analyses.

Why 65?

  • It’s a challenging threshold for any DARWIN to achieve,
  • Hence indicative of higher likelihood for success.

From a trader’s perspective, the aim was to to answer the question:

“How much leverage is required to achieve good returns at sensible risk?”


How good traders use leverage

DARWINs with a D-Score > 65 had the following D-leverage distribution:

  1. Average: 5:1
  2. Median: 3:1
  3. Maximum: 25:1

Within these parameters, these traders achieved returns ranging from -15% to over 70% per annum.

This motivates another question:

Why the dispersion in leverage?

Considering the DARWIN provider’s trading style (mode of operation) and risk appetite can explain the dispersion observed in these findings.

Different trading strategies employ different levels of leverage depending on these two modes.

For simplicity, let’s consider two main categories:

  1. Continuous market exposure,
  2. Scalping (quick entry/exit, 1 to 3 hours in the market on average)

Continuous Market Exposure

DARWIN $LVS is an example of a highly successful trading strategy that maintains market exposure at all times.

Analysis of the data reveals that David and Enrico ($LVS DARWIN Providers) maintain:

  • A D-leverage between approximately 2:1 to 3:1,
  • An underlying strategy VaR of 5 to 10%.

How good traders use leverage


Such strategies typically enter and exit the market quickly.

They average trade durations between 1 and 3 hours on most occasions, and remain flat (out of the market) the rest of the time.

DARWINs $NTI and $ERQ are examples of scalping strategies that demonstrate these behaviours, employing D-leverage ranges of approximately between 5 to 8:1 and 7:1 respectively.

(Note: A DARWIN’s D-leverage distribution can be viewed on its main listing page, under “RETURN / RISK”.)

How good traders use leverage


No more than between 5 and 10:1 D-leverage is required to achieve 20% to 60% returns per annum, at 10% VaR.

Part II will discuss:

1) If the analysis above reveals that successful traders are able to achieve decent returns with less leverage, then why do a majority of traders still do otherwise?

2) At what VaR (%) is a trading strategy’s demise imminent? (and why).

Therein, we’ll describe how we arrive at the VaR, create a trading strategy to demonstrate the impact of various levels of VaR, and show Monte Carlo simulations to that effect (complete with sample code in Python/R).

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