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Leverage increases profits exponentially. Full brokerage-account margin (a leverage of two times) more than doubles your expected annual returns and triples your cumulative return over the test period.

Four times leverage quadruples annual returns and produces more than 15 times the cumulative gains over a non-leveraged trade.

But here's the catch. At five and beyond, you enter nosebleed territory. Drawdowns start to exceed 50%. These are very difficult pysychological 'loss' levels to tolerate, especially when you have bought your position at the top of the peak before the drawdown.

Leverage crests at seven. Beyond that, the favorable impact on ballooning profits starts to diminish vigorously, and drawdowns swing into high double digits. Beyond leverage 12, you are busted, ruined, killed, the end of the game.

As mentioned elsewhere, this region is off limits for most. Some of the best brains in the world have gotten financially killed here (using reported leverage levels in excess of 100--"whom the gods would destroy, they first make mad"). Some of the strongest-stomached, boldest-hearted, super-confident, hedge-fund operators have been murdered here--and buried unceremoniously by the banks.

Oh, by the way, you get here using derivatives. Mostly options, futures, and swaps.

See Explanatory Notes

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