My name in Andrew Abraham. I have been investing in commodities and managed futures since 1994. I am a commodity trading advisor/co manager of a commodity pool who adheres to the philosophy of trend following.
Trend following stresses a disciplined approach to commodity/ futures trading. Successful trend following and commodity futures investing requires patience, discipline and actively managing the risk. What sets us apart from other Commodity trading advisors and commodity pools is that we are not only concerned about the return on investment but how much risk you will have to tolerate to achieve your goals.
Margin to Equity in Commodity Trading.
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.
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Andrew Abraham
A.Abraham@AngusJackson.com
www.AJpartnersinc.com
www.myinvestorsplace.com
Futures trading involves risk. People can and do lose money
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There’s a bunch of controversy out there on this issue, but I tend to agree with the blogger. It’s all a matter of opinion.