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Thanks for clarifying this Tomasz.
Is there any way for AFL to find out the margin rate in effect? I don't see
it listed in the things Status can tell us. Is there another way?
Thanks,
Dave
> Since it may not be obvious I would like to note how position sizing is
> handled when margin account is used.
>
> Margin account allows you to invest more money than you have and
> "double your profit" by borrowing from the broker, or by "buying on
> margin". Of course, the possibility of also doubling losses is
> usually not considered, because it is not an acceptable alternative,
> even though it is real. The Federal Reserve System through its
> policy setting Open Market Committee, determines how much brokers and
> investment banks can lend their client against their investments.
> This percentage is called the margin rate. At present, the rate is
> set at 50%. This means that for every one dollar in actual value
> an investor has in his account, he can borrow another dollar. If an
> investor has 100 shares of fully paid IBM shares in his account,
> he can in effect purchase another 100 shares just by using margin.
>
> So with 50% margin account your buying power is 200% of your cash.
>
> Also the meaning of 'portfolio equity' changes a little:
> Portfolio equity when margin account is used is considered
> as sum of cash plus sum of already open positions MINUS current
> margin loan.
>
> PortfolioEquity = CASH + VALUE_OF_CUR_OPENPOS - MARGIN_LOAN;
>
> (when no margin is used then margin loan is zero and things work
> like it was described before).
>
> This way of defining portfolio equity has the advantage of:
> - being consistent with 'old' definition
> - describe the value of your assets alone (without money borrowed)
>
> With that definition however to use ALL available buying power
> (200% of your cash)
> you would need to use 200% of portfolio equity:
>
> PositionSize = -200; // 200% of equity this provides maximum
> trade size with margin account
>
> If you open multiple positions at the same time, to fully use
> margin account you would need to change your position size to:
>
> PositionSize = -200/posqty;
> // 200% of equity because of 50% margin -> 100% represents YOUR
> funds another 100% represents margin loan
>
> Hope this helps.
>
> Best regards,
> Tomasz Janeczko
> amibroker.com
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