Leveraged Trading

A professional approach to trading FX, stocks on margin, CFDs, spread bets and futures for all traders. By Robert Carver.

A blog post about my new book "Leveraged Trading"

From the back cover:

 

With the right broker, and just a few hundred dollars or pounds, anyone can become a leveraged trader. The products and tools needed are accessible to all: FX, a margin account, CFDs, spread bets and futures. But this level playing field comes with great risks. Trading with leverage is inherently dangerous. With leverage, losses and costs the two great killers for traders are magnified. This does not mean leverage must be avoided altogether, but it does mean that it needs to be used safely.

 

In Leveraged Trading, Robert Carver shows you how to do exactly that, by using a trading system. A trading system can be employed to tackle those twin dangers of serious losses and high costs. The trading systems introduced in this book are simple and carefully designed to use the correct amount of leverage and trade at a suitable frequency. Rob shows how to trade a simple Starter System on its own, on a single instrument and with a single rule for opening positions.

 

He then moves on to show how the Starter System can be adapted, as you gain experience and confidence. The system can be diversified into multiple instruments and new trading rules can be added. For those who wish to go further still, advice on making more complex improvements is included: how to develop your own trading systems, and how to combine a system with your own human judgement, an approach Robert has nicknamed Semi-Automatic Trading. For those trading with leverage, looking for a way to take a controlled approach and manage risk, a properly designed trading system is the answer. Pick up Leveraged Trading and learn how.

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 How does this book differ from my first book, “Systematic Trading”?


You will see from my website that I wrote another trading book a few years ago: “Systematic Trading” (ST). Perhaps you are browsing on-line or in your local book shop and trying to decide which of these two books you should buy. Maybe you already own ST, and are considering adding this book, “Leveraged Trading” (LT), to your collection.
To help you decide, the main differences between the two books are:

  • As the title suggests, ST is mostly aimed at traders who are enthusiastic about systems trading. LT helps new traders learn how to trade by using a system, but then explains how to combine the system with their own human intuition; the method I’ve named “Semi-Automatic Trading”. 

  • The trading systems in ST require large amounts of money (at least £100,000; around $130,000). The Starter System in LT needs just £1,100 or $1,500. I spend a lot of time in LT discussing how smaller traders can make best of their scarce capital.

  • ST is written for relatively advanced traders with some prior knowledge of certain financial concepts. LT is suitable for novices.

  • ST is a generic book which doesn’t go into much detail about individual markets. LT explains how to trade specific leveraged products.

  • ST explains the various components of a complex trading system one by one; it isn’t until the book is finished that you can see the entire picture. In LT I introduce a simple system in its entirety which you can start using right away. I then go on to explain how, and why, you could make it more complicated.

  • ST explains how to design trading systems from scratch, which requires using software to simulate historical system performance (a process called back-testing). In LT I present a system I have already back-tested. I then explain how you can modify the system for different types of trading, and to cover different markets, without needing any further testing.

 

Because I have designed the trading systems in this book with the same principles in mind there are some ideas that readers of ST will find familiar, although there is no duplicated content in this book. I would recommend that you read “Leveraged Trading” (LT) if:

  • You tried to read ST and didn’t get it.

  • You read and understood ST but are struggling to build a simple system from scratch.

  • You have not read ST and are an inexperienced trader who is unfamiliar with financial theory and back-testing software.

  • You are specifically interested in trading leveraged products: FX, CFD, margin accounts, spread-bets, and futures.

  • You do not have enough cash to trade the systems in ST.

  • You are interested in combining your own trading intuition with a trading system: semi-automatic trading.

Of course, if you find this book useful, are interested in purely systematic trading, and want to develop your own trading system further, then I’d definitely recommend making “Systematic Trading” your next purchase. 

 Who should read this book?


 

  • This book is for traders who want to learn how to trade safely using leverage. It covers: 

  • foreign exchange trading 

  • futures 

  • contracts for difference (CFDs) trading

  • spread-betting

  • trading stocks with a margin account

 

No prior experience or knowledge is required, so this book is suitable for newcomers to trading. But even experienced traders should find the book useful, since I will be challenging many of the preconceptions that most people have about trading.

 

You do not need much money to start trading leveraged financial products – just a few hundred dollars or pounds. However, you should only trade with cash you can afford to sacrifice, as with any kind of leveraged trading there is always a possibility that you could lose everything.The examples in this book are aimed primarily at readers from the US and UK. However, traders from other countries can also use the system I explain. Be aware that local regulations may ban or limit the use of certain leveraged products. Tax laws will also be different from country to country.

 From the preface...


 

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

made to be greater than the interest payable

Oxford Dictionary of English

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).

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.

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.

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.

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.

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.

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.

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.

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.

What's in the book​

This is a four-part book.

  • Part one introduces each of the leveraged products we are going to use and explains how to make decisions about your trading setup. 

  • Then in part two I introduce the Starter System. The Starter System is a very simple trading system which trades a single instrument, using just one kind of trading rule to decide when to open new positions.

  • Part three then explains how to extend the Starter System by diversifying into multiple instruments, and by adding new trading rules.

  • In part four I introduce some more advanced improvements that you can make to the Starter System. The final chapter of part four explains how you can continue your trading journey, either by progressing into designing your own trading systems, or becoming a discretionary trader who makes subjective forecasts about market movements whilst still using a system to manage risk: Semi-Automatic Trading.

 

At the end of the book there is a glossary and three appendices. Appendix A lists some useful books and websites; appendix B discusses the calculation of trading costs, and some techniques for reducing them. Finally, appendix C explains how to perform various other calculations required to run a trading system.

  • Part One: Fundamentals    

    • Chapter one: Types of leveraged trading product    

    • Chapter two: Getting ready to start trading    

    • Chapter three: Introduction to trading systems    

  • Part Two: Starting to Trade    

    • Chapter four: Concepts    

    • Chapter five: Introducing the Starter System    

    • Chapter six: Trading the starter system    

  • Part Three: Diversifying    

    • Chapter seven: Adding new markets    

    • Chapter eight: Adding new trading rules    

  • Part Four: Advanced Trading    

    • Chapter nine: From discrete to continuous trading    

    • Chapter ten: Position adjustment    

    • Chapter eleven: What next    

  • Appendices    

    • Appendix A: Useful information    

    • Appendix B: Costs    

    • Appendix C: Calculations    

About the Author
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Robert Carver is an independent investor, trader and writer. He spent over a decade working in the City of London before retiring from the industry in 2013. Robert initially traded exotic derivative products for Barclays Investment Bank and then worked as a portfolio manager for AHL – one of the world’s largest hedge funds – before, during and after the global financial meltdown of 2008. He was responsible for the creation of AHL’s fundamental global macro strategy, and then managed the fund’s multi-billion dollar fixed income portfolio.

Robert has Bachelors and Masters degrees in Economics, and is currently a visiting lecturer at Queen Mary, University of London. Robert manages his own portfolio of equities, funds and futures using the methods you can find in his books.