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Playing down leverage is more about objectivity than subjectivity. Though the society is punishing itself because of leverage, nobody teaches the society about responsible leverage. The leverage brokers don't think it's their job, and though commodity exchanges were designed for risk management and farmers, the exchanges could not do without speculators and disclaimers. Did we somewhere miss out the idea of responsible leverage? Do we need to set rules for this? Do we need to impose a fine institutions in the business of leverage not spending enough time to teach about the risks of leverage to the participants? Why does leverage not come with a banner ad saying "leverage is injurious to your health, and can kill you"? Why is leverage not an obvious addiction as any other vices? Why is it just the trader’s job but not the responsibility of the trading institutions? Now that we punish and educate institutions for irresponsible leverage, rating agencies, etc. how far is regulation from policing exchanges that fail to broadcast that leverage is for the professional and not for the family man putting his kid's university savings in Futures.
Ok! Passive vs. active are two school of thoughts, but on a risk and return level both styles are connected. Both, one-minute trading and 12-month holdings, can be measured on the same scale (The five-minute year). If an exchange offers solutions for all-time frames and disseminates price, why should passive vs. active trade-off, performance and risk trade off (across multiple timeframes) information be any different? Why does trading not come with a risk–return tag? Why are brokerages not forced to incentivise longer holding period investors and deter the short-term traders? However, what is happening is vice versa. Is the regulator not implicitly encouraging speculation rather than discouraging it? I am talking about discouraging, not hating. There is a big difference.
Do we need to wake up the regulator? How many of the Indian traders understand about risk capital? Ok! We have certifications and exams but does the trading participant really understand his risk profile? Does she (he) really know how short-term traders fare compared to investors? And, how many short-term traders burn themselves and leave the markets with a bitter experience? Is successful trading more an illusion or is it about discipline? What is the disconnect between self-discipline and greed that comes with leverage trading? What are the odds? What is the probability of success? How different is allowing someone to do leverage trading and giving a loan after credit appraisal? Why should leverage trading permission be not as thorough as a credit approval?
In conclusion, behavioural finance proves that lack of diversification is one of the biggest mistakes of investors. How should we teach the trader to diversify? Can we teach him to trade but to trade the holding period that fits his risk profile? Can we teach him to know the difference between compulsive trading and professional rule-based trading? Should we tell him that holding periods of 12 months investing do also deliver? Should we teach him and equip him with information and analytics that queries for trade ideas, allowing for high probability trades rather than just frequent compulsive trading, a portfolio approach over a single trade approach, a way to ranking trade ideas, etc. The first step in any case is to ask him, whether he is compulsive or responsible and if he needs help.
The author is CMT and Founder, Orpheus CAPITALS, a global alternative research firm
