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Margin to Equity in Commodity Trading

InvestorEducation / Learn to Trade Nov 02, 2009 - 03:48 AM GMT

By: Andrew_Abraham

InvestorEducation

One of the major issues to long term success in commodity trading or forex trading is to know what is the right amount of capital for ones portfolio. The issues are if do not trade aggressively enough you will not obtain results and vice versa if you trade too aggressively you will stand the chance of blowing up. So what is the happy medium?


There is a simple method for commodity traders to find that optimal degree of leverage… it is called Margin to Equity ratio. Simply the margin to equity ratio in commodity trading is the sum of all the initial margin requirements for all of your positions divided by your account size. There are different opinions but my preference when investing in other commodity trading advisors is a margin to equity ratio of less than 20% max. This gives me some what of a comfort level that the commodity trading advisor is not being to aggressive and should be able to grind out profits over the long run. The lower the margin to equity…the lower the expected potential volatility.

All of this is all well and said…but there are instances in which the exchanges raise margin requirements due to volatility. More so…the more positions the more margin you will be need to put up…thus you have a higher margin to equity…and more potential volatility…

What it all boils down to is …How much exposure at any time…this is important to realize if you are trading your own methodology or if you are interviewing a commodity trading advisor that you are considering investing with. The key is to maximize your profitability with preferably a lower margin to equity… To give an example..you have two commodity trading advisors… one trades with a 10% margin to equity and returns 15% …and the other commodity trading advisor trades with a 25% margin to equity and returns 15%..who is the more efficient trader?

Clearly the one who is trading with a 10% margin to equity…

Bottom line…there is no exact number for margin to equity for commodity trading…the good news is you decide your comfort level… I know my comfort level…I have seen many commodity trading advisors, forex traders and commodity traders blow up because they were not aware of their margin to equity.

If you want to succeed in commodity trading…think about your margin to equity..or when you interview a commodity trading advisor…make sure this is one of the questions you ask.

Andrew Abraham
www.myinvestorsplace.com

Andrew Abraham has been in the financial arena since 1990. He is a commodity trading ddvisor and co manager of a Commodity Pool. Since 1993 Andrew has been a proponent of quantitative mechanical trading programs. Andrew's major concern is not only total return on investment but rather the amount of risk that one would have to tolerate in order to achieve returns He focuses on developing quant models that encompass strict risk adherence and correlation. He has been a speaker at conferences as well as an author of numerous articles. Andrew has spent years researching ideas that have the potential to outperform indices as well as maintain fewer draw downs.

Visit Angus Jackson Partners (http://www.angusjacksonpartners.com) Contact: A.Abraham@AngusJackson.com (mailto:A.Abraham@AngusJackson.com)

© 2009 Copyright Andrew Abraham - All Rights Reserved
Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


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