# Trading capital as percent of net assets



## skc (24 May 2012)

I am interested to know from fellow traders, how big do you trade in relation to your net asset?

For most successful traders, the return on trading capital should exceed most other investments available. So this suggests that one should put every available $ as his/her trading capital if one was to consider on economics alone.

But then there are many realities to suggest that one should not do that...
- Desire for passive income (also makes it easier to take breaks)
- The need for back up money through a bad patch or consecutive flat/negative years
- Genuine alternate investment opportunity with different return profile and drivers
- Management of counterparty risks (brokers do go bankrupt)
- Control of overall stress factors that comes with bad losses, large drawdowns and other blackswans)

For me, I currently deploys ~35% of my net worth (excluding my PPOR) in my trading. It also means that I target earning ~8-15% of my net worth each year.

So what are people's views?


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## So_Cynical (24 May 2012)

skc said:


> I am interested to know from fellow traders, how big do you trade in relation to your net asset?
> 
> For most successful traders, the return on trading capital should exceed most other investments available. So this suggests that one should put every available $ as his/her trading capital if one was to consider on economics alone.
> 
> ...




I'm poor and more of an investor...im in for 100% ~ this FY my ASX investment activity's will give me a return (as a percentage of current net worth) of about 12 > 13 % as long as i dont sell out of HDF this FY.

If i do sell out then it will be more like 16%


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## skc (24 May 2012)

So_Cynical said:


> I'm poor and more of an investor...im in for 100% ~ this FY my ASX investment activity's will give me a return (as a percentage of current net worth) of about 12 > 13 % as long as i dont sell out of HDF this FY.
> 
> If i do sell out then it will be more like 16%




Thanks So_C. You are cynical but a brave man!

I should clarify that I am a full time trader and trading is my main income. For those who has a secure job, the asset deployed would be very different...


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## craft (24 May 2012)

skc said:


> I am interested to know from fellow traders, how big do you trade in relation to your net asset?
> 
> For most successful traders, the return on trading capital should exceed most other investments available. So this suggests that one should put every available $ as his/her trading capital if one was to consider on economics alone.
> 
> ...




Apart from personal property I’m 100% allocated to equity investing.

Not always 100% invested – uninvested is generally held as at call cash or traded under a momentum system.  Main strategy is cash flow investing, diversified between 12-18 Businesses.

I believe a really important issue is too not focus on making a large return on a small portion of your wealth, it’s a waste of your most precious asset - time.  The only measure of significance is return on total available funds. That’s why I focus on investing - It’s more scalable for me.

It's also easier to take breaks and you don't have counterparty risks around the broker. And if something happens to me there is an ongoing passive cash flow already in place from the dividend stream.


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## tech/a (25 May 2012)

I'm different again to those above.

There are times to be fully invested ( that would be approx 50 % of nett worth)
And that would in my case be on margin. I would be systems trading.

Currently and for a number of years I'm out of systems.

I do trade discretionary and happy with an income kick---- also gives me a feel for the market.
Here at fully invested I'm using less than 5% of Nett Worth.


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## Trembling Hand (25 May 2012)

I have found the way to go. I now have ZERO money in, yet leveraged up 100 times. Prop trading. OPM

Heaven = no risk + more gain.


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## craft (25 May 2012)

Trembling Hand said:


> I have found the way to go. I now have ZERO money in, yet leveraged up 100 times. Prop trading. OPM
> 
> Heaven = no risk + more gain.





Good for you TH but why would anybody provide that incentive package? Do they have other mechanisms in place for controlling the risks you take with their money?


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## Trembling Hand (25 May 2012)

craft said:


> Good for you TH but why would anybody provide that incentive package? Do they have other mechanisms in place for controlling the risks you take with their money?




Risk control is their business. Why they provide it? Because they get a ride on the back of very profitable traders while cutting duds early. Think about it this way; 1 good trader who works up to swinging a good size will pay for 20 duds that start with the minimum size and get cut early. They trade traders like traders trade the market.


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## craft (25 May 2012)

Trembling Hand said:


> Risk control is their business. Why they provide it? Because they get a ride on the back of very profitable traders while cutting duds early. Think about it this way; 1 good trader who works up to swinging a good size will pay for 20 duds that start with the minimum size and get cut early. They trade traders like traders trade the market.




Do they control the risk you take other than through the size of capital allocated.  i.e a micro level of risk control over what you do day to day?

Once you’ve earned a sizable capital allocation – what’s to stop you upping your risk profile – which is the logical thing to do when there is no downside – I suppose you would be turfed out on your ear if you blew up – but they would still have a major loss and you would still have your share of all those earlier risks that went your way. (sounds strangely familiar) 

The incentive structure doesn’t make sense to me – but finding the best traders to trade the capital does. 

Do you personally trade any different because you have no risk? or is the risk of losing access to the their capital the risk? or is the incentive structure not an issue because they micro control the risk you take?


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## Trembling Hand (25 May 2012)

Craft will reply later in this thread so as not to get too off topic in this one.

https://www.aussiestockforums.com/forums/showthread.php?t=11988&p=706679#post706679


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## cynic (25 May 2012)

tech/a said:


> I'm different again to those above.
> 
> There are times to be fully invested ( that would be approx 50 % of nett worth)
> And that would in my case be on margin. I would be systems trading.




+1



tech/a said:


> Currently and for a number of years I'm out of systems.




-1 for me (unfortunately). 
My systems have placed me on the wrong side of three very sharp market moves this financial year whilst trading FTSE and DAX derivatives (3 X Ouch! !@#$ing PIIGS!).

With leverage I can generally shore up enough profit to withstand one or two mishaps per year - (that third mishap was the icing on somebody else's cake!).

So congratulations to whomever was fortunate/skilful enough to be on the opposing side of my trades this year!


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## CanOz (25 May 2012)

cynic said:


> +1
> 
> 
> 
> ...




Don't feel too bad mate, my intra-day Asian and European systems went into drawdown through this volatility as well. It was only a portfolio equity stop that was the kill switch. From now on i also have another switch, the VIX. If its over 20 my system switches off on Asian and Eurpean markets. The US isn't too bad, but i will cut back on size.

*You must expect losses*, not wins.

Now we have gone from being 75% vested, to 0 in a matter of two weeks.



CanOz


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## Trembling Hand (25 May 2012)

cynic said:


> -1 for me (unfortunately).
> My systems have placed me on the wrong side of three very sharp market moves this financial year whilst trading FTSE and DAX derivatives (3 X Ouch! !@#$ing PIIGS!).
> 
> With leverage I can generally shore up enough profit to withstand one or two mishaps per year - (that third mishap was the icing on somebody else's cake!).




Should 3 bad trades knock you around so much?


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## skc (25 May 2012)

tech/a said:


> I'm different again to those above.
> 
> There are times to be fully invested ( that would be approx 50 % of nett worth)
> And that would in my case be on margin. I would be systems trading.
> ...




Thanks for the info. You obvisouly have a reasonably diversified income stream and so your set of considerations would be different to the average full time trader.



Trembling Hand said:


> I have found the way to go. I now have ZERO money in, yet leveraged up 100 times. Prop trading. OPM
> 
> Heaven = no risk + more gain.




So true... and if you blow them up the worst you can do is go back to doing what you were doing before.

Do they take someone like me trading equities?

BTW what's the answer to my question when you were trading your own money?



cynic said:


> +1





CanOz said:


> Now we have gone from being 75% vested, to 0 in a matter of two weeks.




And answer from you guys?


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## Trembling Hand (25 May 2012)

skc said:


> So true... and if you blow them up the worst you can do is go back to doing what you were doing before.
> 
> Do they take someone like me trading equities?
> 
> BTW what's the answer to my question when you were trading your own money




There is some guys there trading equities but have no idea of their approach, probably day trading.

Sorry what's the question?


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## skc (25 May 2012)

Trembling Hand said:


> There is some guys there trading equities but have no idea of their approach, probably day trading.
> 
> Sorry what's the question?




Question is: What is the percent of your net assets (excluding PPOR) deployed as trading capital?


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## Trembling Hand (25 May 2012)

skc said:


> Question is: What is the percent of your net assets (excluding PPOR) deployed as trading capital?




Currently 0%, previously all of it outside of cash at hand for the pesky stuff that one needs, food, end of the world funds, bribe money, expensive holidays etc etc.

Of course as you know - never in the same account - MF!!


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## cynic (25 May 2012)

Trembling Hand said:


> Should 3 bad trades knock you around so much?




You are quite right - three conservative trades wouldn't, but the one hundred and ninety five positions I had in play during my last mishap (i.e. my system being derailed by the recent sharp drop in the FTSE) did knock me out of my comfort zone. Fortunately I was trading with those dreaded cfd products  - so most positions involved were not of commensurate size to the full scale contracts.

Yet again, I had the joyful experience of taking a repeat lesson in position sizing/scaling.


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## skc (25 May 2012)

Trembling Hand said:


> Currently 0%, previously all of it outside of cash at hand for the pesky stuff that one needs, food, end of the world funds, bribe money, expensive holidays etc etc.




Thanks. Yes I fully understand the difference between account size for position sizing/risk management purpose vs cash in trading account.

I can see why going to a prop shop can be quite advantageous. One essentially removes significant risk to his/her own wealth, increase income and free up a large chunk of capital that can at worst earn 5% interest.


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## cynic (25 May 2012)

skc said:


> And answer from you guys?




With leveraged products the true level of exposure can be somewhat debatable - one could conservatively argue that under a "worst case" scenario , I had taken on a large multiple of my nett worth. (Yes, I know, I know! - I'm one of those cowpeople! Yippee Kay Ay!)

I generally monitor my exposure during trading in order to limit the risk to between 30% and  50% of nett assets (excluding PPOR).


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## Trembling Hand (25 May 2012)

skc said:


> I can see why going to a prop shop can be quite advantageous. One essentially removes significant risk to his/her own wealth, increase income and free up a large chunk of capital that can at worst earn 5% interest.




Got it right there but there is other ways to leverage up without going in deeper.


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## skc (25 May 2012)

cynic said:


> With leveraged products the true level of exposure can be somewhat debatable - one could conservatively argue that under a "worst case" scenario , I had taken on a large multiple of my nett worth. (Yes, I know, I know! - I'm one of those cowpeople! Yippee Kay Ay!)
> 
> I generally monitor my exposure during trading in order to limit the risk to between 30% and  50% of nett assets (excluding PPOR).




No I don't mean exposure... my exposure is many times my net asset as well. I am refering to your trading capital in relation to your risk. Say you do 2% risk per trade which is $1000, your trading capital on risk management basis is $50k (and whatever that is in terms of % of net assets). But you can trade 2 SPI contracts with face value of $200k with that $50k capital without violating your risk parameters.


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## craft (25 May 2012)

skc said:


> I can see why going to a prop shop can be quite advantageous. One essentially removes significant risk to his/her own wealth, increase income and free up a large chunk of capital that can at worst earn 5% interest.





Same proposition really for doing any job.

However you have to weigh income foregone. The difference between what you could have made on your own funds verses minimal input returns. 

Only if the earnings from employment/prop etc outweigh the forgone income you could make on your own capital does it make sense.

Very quickly becomes a size of capital vs employment earning potential thing.

TH why don’t you trade your capital alongside Prop capital? Best of both worlds.


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## skc (25 May 2012)

craft said:


> Same proposition really for doing any job.
> 
> However you have to weigh income foregone. The difference between what you could have made on your own funds verses minimal input returns.
> 
> ...




Sorry my bad.. should move all this over to the prop shop thread.


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## craft (25 May 2012)

skc said:


> Sorry my bad.. should move all this over to the prop shop thread.




I thought it relevant. 

Especially interested as to why TH has zero of his net assets exposed to trading. I understand why he’s employing his trading skills but why not trade his own equity along side?


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## cynic (25 May 2012)

skc said:


> No I don't mean exposure... my exposure is many times my net asset as well. I am refering to your trading capital in relation to your risk. Say you do 2% risk per trade which is $1000, your trading capital on risk management basis is $50k (and whatever that is in terms of % of net assets). But you can trade 2 SPI contracts with face value of $200k with that $50k capital without violating your risk parameters.




Thanks for clarifying that SKC. The trading strategy/systems I utilise generally allow for multiple trades as the system progresses. The progress of my system/s will usually be managed at the macroscopic level. Discrete trades are allowed to run rampant provided that the overall system drawdown does not meet or exceed my predetermined allowable level. In the event that drawdown exceeds the maximum predetermined level, the strategy is abandoned and all relevant trades are either terminated or fully hedged (pending future termination). In effect I do allow myself to risk up to 50% of my nett assets (excluding PPOR) on deployment of my strategies. The only "emergency stop/exit" is the overall drawdown level.


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## Sir Osisofliver (25 May 2012)

I think I am different from everyone else so far.

Property (both residential and commercial) makes up ~40% of my asset allocation at present, not including the PPOR. Been doing some fantastic stuff in property lately.

About 30% of my assets is long term share portfolio.. Stuff I've held for a while now +10 years; and will probably never sell, generating passive income. Not too fussed about the current fluctuations in value as its conservatively geared at 35% and it's purpose is passive income stream.

About 10% is in cash at present looking for a home... About 400k is tied up with %#}{~>^ MF Global

I've got about 12% at present being actively traded in two systems, one tiny (but consistently profitable system that doesn't scale well) and the rest plugging away at about 14% return for the year on leverage. (would be higher if it wasn't for MF global) thats where I was live testing the chaos modeling system I was working on. (only the shorts - longs were elsewhere thankfully).

Cheers

Sir O


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## odds-on (10 June 2012)

Sir Osisofliver said:


> I think I am different from everyone else so far.
> 
> Property (both residential and commercial) makes up ~40% of my asset allocation at present, not including the PPOR. Been doing some fantastic stuff in property lately.
> 
> ...




Hi Sir O,

Nice set up, but why bother with the consistently profitable but tiny trading system? Surely you are better off sticking the cash into your other schemes?
cheers

Oddson


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