Learning to trade on margin (please help)

[nijshar28]

Hi everyone. I am testing out a systematic, cash-neutral, long/short strategy in a paper trading account with Interactive Brokers. Each day, an algorithm tells me what my target portfolio should look like in terms of relative position sizes. So, I multiply these target percent positions by 97% of my account value to yield target dollars amounts. I then divide these dollar amounts by the last close in order to get the target number of shares, take a difference between my currently held positions and these target positions (in shares), and send the corresponding orders to the broker. The problem is that I constantly run out of Excess Liquidity when I try to place these orders (i.e. I exceed my maintenance margin). This happens even though my account value generally does not move by more than 0.5% in a day (it is a diversified, cash neutral portfolio). Do I hit the margin limit because the short half of my portfolio grows faster when I place these orders (i.e. the short sells go through before the long buys), and the maintenance margin increases? If so what would be the way to counteract it? Should I wait for the buy orders to go through before placing the sell orders? Or should I try keeping more cash in reserve, i.e. target positions to 90% of account value instead of 95-97%? Or am I completely off base and the problem is elsewhere? Any advice is appreciated. Thanks!

 

[nijshar28]

What I wrote above about sell orders going through first does not quite make sense. I guess I just don't understand why I run out of excess liquidity.

 

[murray t turtle]

What I wrote above about sell orders going through first does not quite make sense. I guess I just don't understand why I run out of excess liquidity.

%%
You may want to learn to trade one side first;
you can lose on both sides of the trade. Experienced long only mutual funds keep 97% invested--- but that's full time/experienced pros.
For trading , risking 7% + 93% cash is considered agressive

 

[nijshar28]

%%
You may want to learn to trade one side first;
you can lose on both sides of the trade. Experienced long only mutual funds keep 97% invested--- but that's full time/experienced pros.
For trading , risking 7% + 93% cash is considered agressive

To be honest, I did not understand your points. But I appreciate your willingness to help.

 

[kmiklas]

The problem is that I constantly run out of Excess Liquidity when I try to place these orders (i.e. I exceed my maintenance margin). This happens even though my account value generally does not move by more than 0.5% in a day (it is a diversified, cash neutral portfolio).

Some ways I've dealt with this:

1. Rank your positions based on confidence and structure your orders based thereon. For example, if your algo says to take five positions, rank them from 1-5. Buy the first 4, and if you run out of margin, you lose it on the 5th... which is the one that's least important.

2. Set queue to liquidate. You didn't mention your broker, but in IB, you can set the order of liquidation. If you get margin called, it will sell/cover in a specified order.
https://www.interactivebrokers.com/...book/realtimeactivitymonitoring/portfolio.htm

3. Bigger margin cushion. You mentioned this in your OP. Run some tests to see what works for you; I imagine, somewhere between 5 and 10%

4. Don't forget Reg-T requirements. You can leverage up to 4x max during trading hours, but you get cut back to 2x when market is closed.

Hope this helps.
--Keith

 

[nijshar28]

Some ways I've dealt with this:

1. Rank your positions based on confidence and structure your orders based thereon. For example, if your algo says to take five positions, rank them from 1-5. Buy the first 4, and if you run out of margin, you lose it on the 5th... which is the one that's least important.

2. Set queue to liquidate. You didn't mention your broker, but in IB, you can set the order of liquidation. If you get margin called, it will sell/cover in a specified order.
https://www.interactivebrokers.com/...book/realtimeactivitymonitoring/portfolio.htm

3. Bigger margin cushion. You mentioned this in your OP. Run some tests to see what works for you; I imagine, somewhere between 5 and 10%

4. Don't forget Reg-T requirements. You can leverage up to 4x max during trading hours, but you get cut back to 2x when market is closed.

Hope this helps.
--Keith

Hi Keith. Yes, this is very helpful.

 

[Genevian Speculator]

Yes you are correct, Stocks with low prices or market cap are not marginable, I can't say what the barrier is. I did experience this when buying some ASX:GGG.
Also: if you can afford, try Portfolio Margin, it gives you more cushion and therefore more opportunities, especially when buying treasuries and other bonds as a side gig

 

[HobbyTrading]

Hi everyone. I am testing out a systematic, cash-neutral, long/short strategy in a paper trading account with Interactive Brokers. Each day, an algorithm tells me what my target portfolio should look like in terms of relative position sizes. So, I multiply these target percent positions by 97% of my account value to yield target dollars amounts. I then divide these dollar amounts by the last close in order to get the target number of shares, take a difference between my currently held positions and these target positions (in shares), and send the corresponding orders to the broker. The problem is that I constantly run out of Excess Liquidity when I try to place these orders (i.e. I exceed my maintenance margin). This happens even though my account value generally does not move by more than 0.5% in a day (it is a diversified, cash neutral portfolio). Do I hit the margin limit because the short half of my portfolio grows faster when I place these orders (i.e. the short sells go through before the long buys), and the maintenance margin increases? If so what would be the way to counteract it? Should I wait for the buy orders to go through before placing the sell orders? Or should I try keeping more cash in reserve, i.e. target positions to 90% of account value instead of 95-97%? Or am I completely off base and the problem is elsewhere? Any advice is appreciated. Thanks!

I use a similar system with a daily review near the close of the stock market. The main difference is that my portfolio is long-only, no short positions.
IB's API allows you to get various account values such as net liquidation value, excess liquidity, and a parameter called SMA. This SMA is very useful: you have to make sure that it is always a positive value. If this turns negative near the end of the day IB will liquidate some positions until it is positive again. You may have to throttle down (reduce the 97%) to keep some room left over in this SMA.
Another thing that you can use is to sequence your trades such that you first execute the trades which result in an increase in your cash position, and only then execute the trades which consume cash. Thus, in case of long positions: first place all sell orders and then the buy orders.

 

[nijshar28]

I use a similar system with a daily review near the close of the stock market. The main difference is that my portfolio is long-only, no short positions.
IB's API allows you to get various account values such as net liquidation value, excess liquidity, and a parameter called SMA. This SMA is very useful: you have to make sure that it is always a positive value. If this turns negative near the end of the day IB will liquidate some positions until it is positive again. You may have to throttle down (reduce the 97%) to keep some room left over in this SMA.
Another thing that you can use is to sequence your trades such that you first execute the trades which result in an increase in your cash position, and only then execute the trades which consume cash. Thus, in case of long positions: first place all sell orders and then the buy orders.

Hey. Thanks for your advice. I think I need to have a better grasp of the SMA account and how the margin accounts work in general. Incidentally, here is a video that I think explains it rather well:

.

I don't think not having the excess liquidity is about the SMA going negative, or not though. As you can see in the screenshot below my SMA is highly positive, but excess liquidity is close to 0:

You can see that current available funds are also negative, while the cash account shows over $1M.

In regard to selling first in order to generate cash. I think what you are saying is true if you are selling long positions, but entering short sales first may have the opposite effect as these will increase the maintenance margin faster than they generate cash.

 

[HobbyTrading]

Your screen shot shows a margin requirement of about 992 k USD, on a net liquidation value of 996 k USD. It appears that this margin requirement is limiting your account.
I assume that you have many positions where the margin requirement is 100% of the position size. You may need to investigate the margin requirement for each position separately, to see whether 25%, 50% or 100% is being used by IB. And then throttle down on the instruments which use high margin.

This explanation by IB on how they use SMA might be helpful: https://ibkr.info/node/66