Margin To Equity Ratio - useful or not!???

Discussions about the testing and simulation of mechanical trading systems using historical data and other methods. Trading Blox Customers should post Trading Blox specific questions in the Customer Support forum.
Dean Hoffman
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Post by Dean Hoffman »

Sluggo, this is my point precisely. I agree that Sharpe is not a measure of risk itself however it is what is provided to us by CTA’s to make a decision about them. What measures of risk does the typical Barclays CTA report actually provide us with?

Once again I argue that drawdowns and standard deviation alone are not sufficient because as in the case of a LTCM or many other programs you simply have a case of the biggest drawdown not having yet occurred. So how can we PREDICT the POTENTIAL for drawdowns? All I am saying is mirroring what you were initially saying which is that “all tings being equal, the manager using less margin is taking less riskâ€
sunyata
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Post by sunyata »

LeapFrog wrote:I'll report back with the effects if it works out. I expect it should actually improve my historical back testing results because as of now, I use the most current margin rates which are high by historical standards and thus penalize my results by excluding trades which would not otherwise be excluded if lower margins were used.
Hi LeapFrog,
Were you able to obtain comprehensive historical margin data?
LeapFrog
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Post by LeapFrog »

sunyata wrote:
LeapFrog wrote:I'll report back with the effects if it works out. I expect it should actually improve my historical back testing results because as of now, I use the most current margin rates which are high by historical standards and thus penalize my results by excluding trades which would not otherwise be excluded if lower margins were used.
Hi LeapFrog,
Were you able to obtain comprehensive historical margin data?
Unfortunately not. Could not even find any source that might have it at any price...

Presumably each individual exchange has it which would make collecting it from them all a difficult task at best.

If anyone has any ideas/suggestions/leads????

For most traders, at least on this forum, this is a non-issue since LTTF systems tend to use low margin to equity levels. I like to do the opposite of this.
kianti
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Post by kianti »

If anyone has any ideas/suggestions/leads????
How about using historical volatility x pointvalue x YourMultiplier?

best regards, as ever
LeapFrog
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Post by LeapFrog »

kianti wrote:
If anyone has any ideas/suggestions/leads????
How about using historical volatility x pointvalue x YourMultiplier?

best regards, as ever
Yes, that seems to be the best proxy on offer - my analysis of that shows the results do not correlate well with reality, making the exercise somewhat academic. The exchanges use a complicated algorithm to determine margin requirements combined with a pinch of magic dust - pretty hard to reverse engineer IMHO.
sunyata
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Post by sunyata »

LeapFrog wrote:For most traders, at least on this forum, this is a non-issue since LTTF systems tend to use low margin to equity levels. I like to do the opposite of this.
Could you expound on this a little? I've noticed in my testing that to generate a CAGR over 30% I have to use a margin-equity ratio that is at least 60% on average. I am just beginning to start testing though, so perhaps I am not far along enough in the learning curve to fully understand what you are talking about.
borderline
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margin-equity vs. heat

Post by borderline »

Leapfrog,

I'm wondering if you've had any success or 'aha' moments in your quest for obtaining historical margin requirments? I'm looking at this issue now myself and I wondering how to go about handling it, or if it even needs to be handled??? It seems portfolio heat algos handle the risk just fine and margin filters just skip trades that I'm fairly certian would not have been an issue since the backtest is applying today's margin requirements to the past.

If anyone has anything to add I am very interested. Sluggo, thoughts? Others?

Best,
Borderline
LeapFrog
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Post by LeapFrog »

sunyata wrote:
LeapFrog wrote:For most traders, at least on this forum, this is a non-issue since LTTF systems tend to use low margin to equity levels. I like to do the opposite of this.
Could you expound on this a little? I've noticed in my testing that to generate a CAGR over 30% I have to use a margin-equity ratio that is at least 60% on average. I am just beginning to start testing though, so perhaps I am not far along enough in the learning curve to fully understand what you are talking about.
Take a look at the wonderful equity curve Mr. Garner cooked up in this thread...

viewtopic.php?t=3820&postdays=0&postorder=asc&start=20

If only real life were like that. That is a good starting point to find the theoretical edge of a system, but what we need to do after getting that result is start applying real world constraints - one of them being margin requirements. But what is real? The fund industry likes to operate with margin/equity ratios somewhere around 30 percent or less. But what is magical about this? We independent traders don't have to be constrained by that. In my case, I never want to get a margin call but I also don't want my risk equity languishing in my trading account not working (not being in the market). Hence my desire to push my margin to equity ratio as high as possible without risking getting a margin call.

Using a margin filter like the one I offered up here...

viewtopic.php?t=3524&highlight=margin

enables me to more confidently push these limits. However, even since early 2007, margin rates at the exchanges have in many cases doubled or tripled, making this filter useless. Hence my quest to get accurate historical margin rates - but no luck there.

If in backtesting you find that your daily margin/equity ratio never gets near 100 percent, then this is a non-issue for you. If on the other hand it exceeds 100 percent an appreciable amount too often (as my Suites do in backtesting) then it requires further investigation and maybe modification of your risk parameters. (I posted a Graph Blox somewhere that tests this for you.)

What I do for now is use both current margins for backtesting and those that were in place a couple of years ago and compare results, then make a judgement about where reality might be. Not ideal by any means.

TB has the horsepower to deal with historical margin rates. What I/we don't have is enough accurate margin rates historical data across enough exchanges. On the other hand, I can't say this is a high priority issue for me as I've done extensive testing on this issue for some time and know my systems well enough to be comfortable with this issue.

Hope this helps explain further.
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Re: margin-equity vs. heat

Post by sluggo »

borderline wrote:Sluggo, thoughts?

Not surprisingly this topic has been discussed before; I have participated. To find my thoughts you can either use Google (example below), or the Search button here on the Trader's Roundtable.
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DPH
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Post by DPH »

I just realized while perusing various threads that this discussion of margin to equity ratio logically picks up on the Blox forum here: Margin to Equity Ratio
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