VanTharp's Commentaries
Simulations
Q: In setting up your own simulation, it asks for an input on margin, but it doesn’t seem to use it when you run a simulation. Since I’m only trading FX and the Aussie 200 Index, which have 100 to 200% leverage, that is a problem. Also, you mention version 4.0, but when I talked to one of your customer service people they didn’t know when it might be available – I asked for some sort of a guess and got six months. Any suggestions on Monte Carlo simulators (free or up to around $100, eg Excel plug ins) in the meantime?
Re leverage, while there is some discussion, I don’t feel like I have a good feel for how leverage might impact many of the points/specific suggestions in the book. One of the areas where it is covered more than in passing is Table 9.3. However, I don’t understand the rationale behind the suggested reductions in portfolio heat. Also, if you have a SQN of 4 (I wish) how much do you suggest reducing portfolio heat if your leverage is 100% and how much if 200%? If your SQN is 1.7 to 2.5, why don’t you reduce maximum portfolio heat if leveraged?
A: 1% risk is 1% risk and it doesn’t matter if you are 100% leveraged or 1000% leverage. That’s critical. Now leverage increases the possibility of ruin with large gaps that go through your stop, but it doesn’t change your risk if you have a stop. Margin doesn’t enter into the game except that you cannot buy more shares of stock than you have cash. Simulators are discussed extensively in the Definitive Guide to Position Sizing.
Tags: economic-event
