Futures leverage explained: how margin changes backtest drawdown

Contents

1. How much leverage does a futures contract actually give?
2. Why does leverage make drawdown look bigger in your account?
3. How many 大台, 小台 or 微台 contracts can a drawdown support?
4. Why can high leverage end a trade that the backtest shows recovering?
5. How should you read a backtest's drawdown before choosing an account size?
6. Frequently asked questions

Futures leverage is the contract's full value divided by the margin you deposit. On TAIEX futures the margin is a small part of the contract's value, so a modest index move can use up the whole deposit. Judge a backtest's drawdown against the cash you will hold, and size 大台, 小台 or 微台 so the worst drawdown plus margin still fits.

How much leverage does a futures contract actually give?

A futures contract gives leverage equal to its notional value divided by the margin, and for index futures that number is large. Notional value is the full market value the contract controls: the index level times the contract's point value. Margin is the deposit your broker holds so you can keep the position open. It is a good-faith deposit, not a down payment on the contract.

Leverage (期貨槓桿) puts these two numbers side by side:

Leverage = notional value ÷ margin

Here "notional value" is the index level times the point value, in New Taiwan dollars (NT$). "Margin" is the initial margin per contract set by the exchange, or by your broker if the broker asks for more. The answer is the leverage multiple (期貨槓桿倍數): how many dollars of index exposure each dollar of margin controls.

TAIEX futures come in three sizes with fixed point values:

Contract	Common name	Point value (NT$ per index point)	Size compared with TX
TAIEX futures (TX)	大台	200	1
Mini-TAIEX futures (MTX)	小台	50	1/4
Micro-TAIEX futures (TMF)	微台	10	1/20

The exchange sets margin levels and changes them over time. Check the current values on the TAIFEX contract specification and margin pages, or use the free TAIEX futures margin calculator to see the margin per contract for TX, MTX and TMF.

Why does leverage make drawdown look bigger in your account?

Leverage does not change a strategy's drawdown in index points, but it decides how large that drawdown is compared with your money. Maximum drawdown is the largest fall in equity from a peak to a later low, before a new peak is reached. A backtest on one contract usually reports it in money per contract. That money figure only becomes a risk number when you divide it by the account you will trade with.

Think of it like a car's top speed: the engine allows it, but how fast you drive is your choice. Margin leverage (期貨保證金槓桿) works the same way, which is why it is the wrong reference for judging risk. If you fund the account with only the margin, you trade at the full contract leverage, and an ordinary drawdown can take most of the account. If you fund the account with several times the margin, the same drawdown is a smaller share of your money. The exchange sets the maximum leverage. Your account size sets the leverage you actually use.

A more useful number is account leverage: the total notional value of your open contracts divided by your account equity. It uses the same division as above, with your whole account in place of the margin.

How many 大台, 小台 or 微台 contracts can a drawdown support?

Size contracts from the drawdown you can accept, with room for a worse drawdown than the backtest showed, and then choose the contract size that fits. The historical maximum drawdown is one path through the past. A future drawdown can be deeper, so plan with a safety factor. Use these steps:

1. Read the maximum drawdown in index points. Points let you compare TX, MTX and TMF directly, because only the point value differs.
2. Apply a safety factor. Multiply the drawdown by a factor you choose, for example 1.5 or 2, to plan for a deeper drawdown than history showed.
3. Set your drawdown budget. Decide the largest fall you accept as a share of the account, and turn it into money.
4. Divide the budget by the planned drawdown per contract. Do this for each contract size and round down.
5. Check the margin at the worst point. After the planned drawdown, the remaining equity must still cover the margin for all open contracts.

The smaller contracts matter because they let you fit a size to the budget. In the example, one TX is too large, but MTX and TMF let you trade close to the budget. The free drawdown calculator finds the maximum drawdown and recovery from an equity series, so you can repeat this for any strategy. Per trade, the position size calculator works the other way round, since you give it account risk and stop distance and it returns a contract count.

Why can high leverage end a trade that the backtest shows recovering?

High account leverage lets a small open-trade dip reach the margin level, and most backtests never compare their lowest equity with a margin level at all. A margin call is the broker's request to add money when equity falls below the maintenance margin; the article on margin trading, leverage and margin calls in backtests explains the full process. The higher your account leverage, the smaller the index move that brings equity down to that line.

Two habits in reading backtests hide this risk:

• Reading drawdown on closed trades or bar closes. The deepest point often comes inside a bar or during an open trade. Check whether the drawdown you read includes open-trade losses, and size from that deeper figure.
• Assuming you always hold the position. A forced close at the worst price ends the trade early. The backtest shows a recovery that a liquidated account never sees.

Gaps make this worse. The TAIEX futures market has a day session and a night session, and prices can jump between them or over a weekend. A stop order does not protect you from a gap, so the account can fall further than the stop distance suggests.

Margin changes are a separate input, because a backtest runs on price data and applies no margin. Plan for a margin increase by checking that a higher margin still fits after your planned drawdown; the article on what happens to your strategy when futures margin is raised walks through the steps.

How should you read a backtest's drawdown before choosing an account size?

Read drawdown in points after costs, then convert it to your account with a safety factor and a margin check. Costs matter here because commission and slippage deepen every losing streak. A drawdown measured without them is too small. AlphaPrime (Valynox) runs its backtesting with fees, slippage, next-bar execution and trading sessions, so a TAIEX futures day-only or full-session test reflects the costs and timing you would trade with. The Performance Report shows equity, drawdown and individual trades, which gives you the worst drawdown and the trades inside it.

Then answer four questions for each strategy:

1. How many index points was the maximum drawdown, after costs?
2. How long did it take to recover to a new equity peak?
3. With the safety factor, how many TX, MTX or TMF contracts fit your drawdown budget?
4. With a raised margin and the planned drawdown, does the account stay above the maintenance margin?

What this means if you use AlphaPrime: read the drawdown in the Performance Report in money, divide it by the contracts and the point value to get points per contract, and do the account-size and margin arithmetic yourself with today's exchange margin. Choose the contract size last, after the strategy has passed its tests.

Frequently asked questions

How do you calculate futures leverage?

Divide the contract's notional value by the margin per contract. Notional value is the index level times the point value, for example NT$200 per point for TX. If the notional is twenty times the margin, the leverage is 20 times.

Is a higher leverage multiple more dangerous?

The contract's leverage multiple only sets the maximum exposure the margin allows. The risk you carry depends on account leverage: the total notional of your positions divided by your account equity. Funding the account with several times the margin lowers the leverage you actually use.

Should I size contracts by margin or by drawdown?

Size by drawdown, then check margin. Margin tells you how many contracts you are allowed to open. The backtest's maximum drawdown, with a safety factor, tells you how many you can hold through a bad period without losing too much of the account.

Why use 小台 or 微台 instead of 大台?

MTX is one quarter of TX and TMF is one twentieth, so they let you match position size to a smaller drawdown budget. The strategy's drawdown in points stays the same. Only the money per point changes.

Can a backtest show when I would have had a margin call?

A standard backtest on one contract does not track a cash balance or a margin level, so it does not show margin calls. You can estimate the risk yourself by comparing the deepest open-trade drawdown with your account size and the maintenance margin.