From the preface...

 

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Leverage (verb): use borrowed capital for an investment, expecting the profits

made to be greater than the interest payable

Oxford Dictionary of English

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Not so many years ago the use of leverage for trading was the exclusive domain of highly-trained investment professionals. Sharply dressed denizens of Wall Street orthe City of London would happily borrow, and then gamble, hundreds of millions of dollars or pounds. But such risky behavior was not for the average Joe (or Jane).

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Things have changed. With the right broker, and just a few hundred dollars or pounds, anyone can become a leveraged trader. In the US it is easy to buy stocks, or bet on them falling, with a margin account. UK traders can make spread bets or take out contracts for difference (CFDs) on their favorite shares, as easily as betting at the local racecourse. In both countries, and in many others, you can trade foreign exchange (FX)

and futures.

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Leverage has levelled the playing field for smaller investors, but it has also made trading riskier. Leverage is inherently dangerous. With too much leverage a modest trading loss can be magnified into a wealth-destroying explosion. Leverage also increases the costs of trading: doubling your leverage will double your trading costs. Traders who manage to avoid a quick death from blowing up will instead die slowly, with high costs gradually emptying their accounts.

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Because leverage is so dangerous, it is absolutely vital to use a safe level of leverage when trading. Deciding on how much leverage to use is the single most important decision that any trader will have to make.

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To protect yourself from the dangers of leverage it is my belief that you should use a system when you start trading. This comes from my own experience: I have traded leveraged financial products for an investment bank without a system, and for a multi-billion-dollar hedge fund that traded exclusively with systems. Now I trade my own money using purely systematic methods.

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Trading systems have a poor reputation, but a simple system is much less likely to lose money than an inexperienced trader. If you use a system when you start trading, it will significantly improve your odds of becoming a profitable trader. A good system will calculate the right amount of leverage, protecting you from the dangers of serious

losses and high costs.

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But finding a well-designed trading system is a daunting task. There are thousands of books and websites offering potential systems, many of which are badly designed and even potentially dangerous. Many system designers give scant attention to the importance of managing risk by controlling leverage.

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Instead they rely on incorrectly calculated stop losses to limit losses (and indeed, as I explain later in the book, a stop loss is unnecessary in a properly-designed trading system). They are obsessed with finding the elusive perfectly accurate trading rule, when it is far more important to control risk and trading costs. They try and predict the

price changes in a single market, but a good system designer knows that diversifying across many different markets is likely to be far more rewarding.

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In this book, I introduce a properly-designed, but also simple, trading system. I then explain how to improve its expected performance: by trading additional markets, and also through adding new features. Not everyone will want to continue trading with a system. As you gain skill and knowledge you may wish to start using your own

intuition to make decisions about buying and selling. I will explain how to combine human judgement with a trading system, so that you remain protected from the dangers of excessive leverage. This method, which I call Semi-Automatic Trading, is described in the final chapter.

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