Leverage

[JulianCohen]

I have a question on leverage primarily for Nick, but I’m interested in hearing everyone’s views.

Assume one has an account at one broker, IB, in cash.
60% is devoted to rotational systems and 40% to MOC and MR.

How much is considered “safe” to apply to one equally weighted MR and MOC system, assuming 2x leverage on MR and 4x on MOC?

In my case I look at 4 times ‘Current Available Funds’ in the account view to gauge my tradable amount. This figure is an IB generated one and presumably includes a consideration for stock held as well as cash held. I then take 3/4 of that sum (in order to leave a buffer), and split it 60/40. I apply that 40% to the short term systems according to their leverage multiple.

This should leave me with plenty of cash to spare in case every system is fully employed on a market fall. This also means that I am not utilising the absolute full leverage but I prefer to err towards caution.

However am I erring too much to the side of caution as there is potentially 60% of the 3/4 that I am not utilising?

What are your views on this?

[TimothyStrickland]

I have taken a similar approach in the past. However, I am under the impression that if we are splitting our cash over multiple different systems, the risk of leverage diminishes some does it not? I guess I am assuming that it would be very rare for all my systems, short term and long term would go into a stiff drawdown all at the same time. Maybe this is a wrong assumption? The backtests I have run over my systems shows that they rarely, actually never have had huge drawdowns at the exact same time.

This is a good question and would also like to hear others opinions and Nick’s recommendations.

[TimothyStrickland]

After October 2018 though, I’m not so sure I believe what I just said 100% now. Just because something hasn’t happened before doesn’t mean it never will.

[Nick Radge]

I’m not sure my answer is the optimal solution, but I like to keep it very simple. That said my main IB account also houses a number of ‘strategic’ positions that are funded and therefore could help as collateral for the trading systems.

I allocate a certain amount of cash to each strategy first. That cash sits in the account.

I then trade that allocation as tested, i.e. momentum systems without leverage. If those systems are defensive, then the account holds has excess cash.

The MR systems will trade at either 50% LVR or 25% LVR.

I have rarely run into issues with margin – maybe 3 days over the last year or two from memory.

[LEONARDZIR]

Nick,
A followup question. I have been trading my MR system with 50% leverage in one account. Up to this point I have traded 100% of the cash in that account. I check the account before the end of the day to make sure I won’t get a margin call. If so I plan to cull down the positions before the close. The downside is I have to check the market intraday.

Alternatively I was thinking of doing what Julian does namely reducing the cash so I would not get a margin call and adding a second nonlevered position so the excess cash is used. Any opinion?

[Nick Radge]

Quote:

A followup question. I have been trading my MR system with 50% leverage in one account. Up to this point I have traded 100% of the cash in that account. I check the account before the end of the day to make sure I won’t get a margin call. If so I plan to cull down the positions before the close. The downside is I have to check the market intraday.

If you’re using IB then a margin call will get facilitated without your input, i.e. if at the close the margin requirement is not met, then IB will close a position(s) until it gets back under the required level. You will get an email from IB just prior but they’ll act automatically regardless (I know from experience).

[LEONARDZIR]

Nick,
I just hate the idea of not utilizing all my cash when a system is turned on

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