David Jenyns and Stuart McPhee, well known, experienced traders, talk about the merits of keeping part of one's trading float back from active trading.
David: A question: do you recommend having all your trading capital in active trades or should some be kept as cash, and if so what percent?
Stuart: A good question, but it all depends. For example, my super fund I always have roughly ten percent in cash because, and this is probably more specific to Australian taxation law, during the year you have an obligation to pay tax, pay as you go. So I've always got that account with about ten percent of my capital - it's cash, it's secure, nothing will happen to it. It allows me to fulfill those tax obligations throughout the year as I have to pay as you go. But having said that, if that isn't a requirement for you and trading opportunities present themselves, there's no reason to keep some cash set aside. Using nearly everything in active trading is a great idea.
David: I'm in a similar frame of mind about that. If you're looking to trade the markets and you've set aside your trading float that's your intended purpose for the money assuming you have appropriate trading candidates. My gut feeling would be you should have, whenever possible, all your money invested. Obviously, it comes back to your system, making sure you are getting the signals. You don't want to put your money in just for the sake of having all your money in.
But I don't see any reason to limit, oh, I'll keep ten percent of the trading float just sitting in the account, just accruing interest, not involved in active trading. It's part of how you structure your wealth creation; you'll have a certain amount allocated for your trading float, you'll have a certain amount allocated for your real estate, you'll have a certain amount for cash in the bank. I see that separate from my trading float. Also with regard to backtesting you can see the utilization of your trading float. You can enter your trading float in like before. You can see over a set period of time whether you're fully utilizing or partially utilizing your cash and I always try to get as close to the top of that band as possible. So I'm as close to being maxed out as possible without being maxed out all the time.
If you're maxed out all the time and new trading opportunities come up and you don't have any capital available, it's going to throw out your backtesting a little bit because with trading opportunities you may not have been able to open.
Depending on which trade you ended up taking could significantly affect the ultimate end of your testing as to whether you made a profit or not because of whether or not you took a particular trade. So that's why if you are going to trade a particular type of system where you are constantly maxed out, where you look at Monte Carlo testing, where you look at what is the standard deviation of my trading system. How far is it between my backtesting results? What is the least profitable scenario and the most profitable scenario and you find that gap widens the more you fully utilize your cash.
You don't want to be maxed out as possible when you are doing backtesting. But definitely the major part of your float should be used for active trading. - 31876
David: A question: do you recommend having all your trading capital in active trades or should some be kept as cash, and if so what percent?
Stuart: A good question, but it all depends. For example, my super fund I always have roughly ten percent in cash because, and this is probably more specific to Australian taxation law, during the year you have an obligation to pay tax, pay as you go. So I've always got that account with about ten percent of my capital - it's cash, it's secure, nothing will happen to it. It allows me to fulfill those tax obligations throughout the year as I have to pay as you go. But having said that, if that isn't a requirement for you and trading opportunities present themselves, there's no reason to keep some cash set aside. Using nearly everything in active trading is a great idea.
David: I'm in a similar frame of mind about that. If you're looking to trade the markets and you've set aside your trading float that's your intended purpose for the money assuming you have appropriate trading candidates. My gut feeling would be you should have, whenever possible, all your money invested. Obviously, it comes back to your system, making sure you are getting the signals. You don't want to put your money in just for the sake of having all your money in.
But I don't see any reason to limit, oh, I'll keep ten percent of the trading float just sitting in the account, just accruing interest, not involved in active trading. It's part of how you structure your wealth creation; you'll have a certain amount allocated for your trading float, you'll have a certain amount allocated for your real estate, you'll have a certain amount for cash in the bank. I see that separate from my trading float. Also with regard to backtesting you can see the utilization of your trading float. You can enter your trading float in like before. You can see over a set period of time whether you're fully utilizing or partially utilizing your cash and I always try to get as close to the top of that band as possible. So I'm as close to being maxed out as possible without being maxed out all the time.
If you're maxed out all the time and new trading opportunities come up and you don't have any capital available, it's going to throw out your backtesting a little bit because with trading opportunities you may not have been able to open.
Depending on which trade you ended up taking could significantly affect the ultimate end of your testing as to whether you made a profit or not because of whether or not you took a particular trade. So that's why if you are going to trade a particular type of system where you are constantly maxed out, where you look at Monte Carlo testing, where you look at what is the standard deviation of my trading system. How far is it between my backtesting results? What is the least profitable scenario and the most profitable scenario and you find that gap widens the more you fully utilize your cash.
You don't want to be maxed out as possible when you are doing backtesting. But definitely the major part of your float should be used for active trading. - 31876
