Published
Ask a new trader how to make more, and the answer is always the same: more leverage. 10x. 25x. 50x. Bigger number, bigger gains, right?
I used to think so too. Then I ran the numbers — the same strategy, the same 18 years of data, just dialing leverage up. What came out wasn't a bigger pile of money. It was a smaller one. And past a point, no money at all.
The actual results
I took a simple, sane strategy (hold the index while it's above its 200-day average, sit in cash otherwise) and ran it on SPY across 18 years — through 2008, 2020 and 2022. Same trades every time. Only leverage changed. Borrowing cost included.
SPY, 18 years, by leverage:
- 1x → +7.2%/yr, worst drawdown −22%
- 2x → +4.7%/yr, drawdown −49%
- 3x → +0.7%/yr, drawdown −72%
- 5x → −10.8%/yr, drawdown −97%
- 10x → −41.5%/yr, drawdown −100% (wiped)
Read that again. At 5x the strategy lost money over 18 years while the 1x version quietly compounded. More leverage, less money. The opposite of the promise.
Why this happens: volatility drag
Leverage multiplies your daily swings — both ways. And losses hurt more than equal gains help. Drop 50%, and you need +100% just to get back to even. Leverage widens every swing, so it digs the recovery hole deeper than the gain that follows can fill. Compound that over years and the "drag" eats your returns from the inside. The bigger the leverage, the harder it pulls.
It's not a fee. It's not bad luck. It's arithmetic — and it's working against you on every leveraged position you hold through volatility.
"But QQQ at 2x did better"
True — on the tech-heavy Nasdaq, 2–3x squeezed out a slightly higher return (~16%/yr) than 1x (~13.7%). But look at the cost: the drawdown went from −22% to −65%. You'd have watched two-thirds of your account vanish to earn a couple of extra percent a year. At 5x even QQQ's return collapsed to +7% with a −91% drawdown. Nobody holds through −91%. They get liquidated, or they panic-sell at the bottom — and the backtest's "return" never reaches the real human.
What to actually do
Use leverage like seasoning, not the meal. Low single digits, if at all. The goal isn't the highest theoretical return on a spreadsheet — it's a return you can actually survive to collect. Before any leveraged trade, check where you'd get wiped with the liquidation calculator, and size the position from risk, not hope, with the position size calculator.
The slider that feels like the gas pedal is mostly a self-destruct button. The math doesn't care how confident you are.