Blue, going for leverage is a matter of choice.
The equation for the leverage was given, it is:
A(t) = A(0)∙(1+(r+α) – L)^t. As long as: α > 2∙L, you will be ahead. As long as your drawdown does not reach -100% as the example you provided! Since then, leverage or not, you are out of the game.
The leverage fees are pulling you down, but the (r+α) are pulling you up. And this is compounded over time.
To calculate the difference, one could say: A(t) = A(0)∙(1+r+α)^t without the leverage as Q reports it. And use: A(t) = A(0)∙(1+(r+α) – L)^t to have an estimate of the total margin cost.
IB charges less than 3% margin. So make the margin 5%∙100,000 = 5,000. On the other side, r+α could be higher than 20%: 20%∙100,000 = 20,000....
Taking the 1.4 RISK_LEVEL backtest, you get:
A(t) = A(0)∙(1+(r+α))^t = 100,000∙(1+ 0.69 )^t, as reported by Q, and
A(t) = A(0)∙(1+(r+α) – L)^t = 100,000∙(1+ 0.69 – 0,05)^t, when deducting leverage fees.
The difference between these two is: 384,166. Those were the added expenses associated with the higher return.
The added leverage resulted in a total return of: 8.677 millions – 384,166 = 8.292 million.
Probably worth the expense for some.
In payoff matrix notation, any stock trading strategy can be represented as:
A(t) = A(0) + Σ(H.ΔP). When you add a 1.4 leverage, all it does is: A(t) = A(0) + 1.4∙Σ(H.ΔP). It is not used by the price, but by the inventory holding. Meaning that the bet size increases by 1.4. There will be margin charges as illustrated above.
Some like it, some don't. I see it as a matter of choice.
However, a caveat, not all trading strategies can support leverage, some are really bad at it. On the other hand, some strategies can, and I think this one can.