Cash account versus margin account

I guess that all of you already knew this for a long time, but I just discovered that it makes a huge difference whether you trade from a cash account of from a margin account. I have cash account because I don’t dare to have a margin account yet. As I understand it, (1) with a margin account you’ve twice the buying power (and twice the risk, that’s why I don’t want it), and (2) with a margin account you can have short positions (and an even larger risk), with a cash account not.



Suppose that a system has 40% profit in a month, and that the system got 50% of these profits from short positions. Then with a cash account the profit will be less than 10%. That’s quite a difference!



Given that the profit estimates are generally considered too optimistic on this forum, I think that it would be a good idea to provide for stock trading systems, in addition to the present cumulative statistics, some statistics under the assumption of a cash account . I’ve two reasons for this:



1. For beginners like me, it might temper their expectation.

2. For people who want to work with a cash account. Even if I know that this effect exists, it is hard to figure out how much profit of a system is due to short positions. So a system that works with only long positions is difficult to compare with a system that uses both long and short positions of which I want to use only the long ones.



The connectivity problems are of course much more important, but perhaps this is a nice idea for the far future.

Even if you don’t want to take short positions or utilize the 2:1 (or 4:1 intraday for pattern day trader) buying power that a margin account offers I would still recommend opening a margin account.



With a cash account you have to deal with T+3 settlement rules. Even with a slow swing-trade system this could cause you to miss trades by not having buying power available to make a called trade or you could end up running afoul of the SEC free ride rules.

ules,



(1) with a margin account you’ve twice the buying power (and twice the risk, that’s why I don’t want it)

It’s half of true. In stocks you have twice the buying power (conservative approach), but you may to not use it. Pete already underlined disadvantages of not having margin account in stocks. Major is settlement. If you think that 2:1 is big risk you can check what is leverage of forex and futures guys :wink:



Suppose that a system has 40% profit in a month, and that the system got 50% of these profits from short positions. Then with a cash account the profit will be less than 10%. That’s quite a difference!

Tips: Check your broker shortability list. There might be a problem if a stock isn’t shortable for you. However it looks good on paper :wink:



Eu

Good to know. I didn’t know the T+3 rule. Thanks, Pete.

Eu, I didn’t mean to say that everyone should have a cash account. I just meant that it would be nice if C2 had the feature to compare how systems perform on a cash account (or a margin account without using the margin and short positions).



I didn’t want to say that margin accounts and short are risky in general. They’re risky for me because I’ve so little experience with trading. I understand that the leverage is bigger with futures. But these guys know what they’re doing, I suppose!

Jules,

I didn’t mean to say that everyone should have a cash account.

Ooops. I didn’t mean it as well. Moreover, I backtest on base of cash account only without any reinvestment and in longest data that I have it’s any first step in backtesting. Your approach is absolutely correct in terms of stability of a system.



I didn’t want to say that margin accounts and short are risky in general.

I can say :wink: There are risky. Even if you know what you’re playing, but you’re playing not your money. It’s your money+margin and it’s different story.



I just meant that it would be nice if C2 had the feature to compare how systems perform on a cash account

However, I think your suggestion is totally up to a system vendor. Any system vendor can publish any stats on C2 on his/her system forum. So just request him/her :wink: It’s practically impossible to emulate it in C2.



Eu

Why would it be so difficult to emulate in C2? I would think: Just add up the profits minus losses off the long positions, as it is done already in the “Cumu $” for all positions. Do I miss something?



I agree that the system vendor can do that too. And I can do it myself, with some effort. But I thought that one of the objectives of C2 is to let the user easily compare the perfomance of various systems.



But perhaps I’m the only one who is interested in this. I’m not a representative user, I agree…

Jules,

I would think: Just add up the profits minus losses off the long positions, as it is done already in the “Cumu $” for all positions. Do I miss something?

Any system vendor will not agree, because some stocks are shortable from some brokers and shorts might be a part of system. Hmm… e.g. a system goes long and from some point reverse to short with closing of long position. Simply you cannot remove shorts from the kind of systems. As addition even if a system uses only long there might be different money management for cash or cash+margin. C2 cannot predict what kind of MM is used by a system vendor.



I’m not a representative user, I agree…

Don’t worry. I’m not representative system vendor as well and we’re both losers lol More seriously, I’d like that Matthew posted to-do list of C2 somewhere with some schedule of releases. In the case anybody will know about acceptance of his/her proposition. And if it’s not accepted/scheduled you can ask privately what was a reason without crying on the forum.



Eu





Any system vendor will not agree, because some stocks are shortable from some brokers and shorts might be a part of system.



Yes I understand that. But C2 allows you in the Trading Permissions to allow only long stocks, and disable short, regardless of what the system says. It would be nice to have an idea of what happens if I do that. And I must do that, because I’ve only a cash account.



I agree that I’ve indeed missed something in that the MM would probably be different if the system vendor assumes a cash account. So the size of the trades will be different in a way that C2 cannot predict, and therefore it is indeed more complicated than just adding up the long trades. And the T+3 rule makes it more complicated too.



But right now I use a system that assumes and uses a margin account, while I can do only the long part of it. Thus, although my suggestion is too complicated, my question is still valid. Would it be an idea to report (1) the % long trades and (2) the % winning trades and the average profit % per trade separately for the long trades? I believe this would not depend on the MM.



BTW, I am not a native speaker; what does ‘lol’ mean?. And I’m not sure whether I understand ‘crying’. It was just a suggestion to make things a little easier (for me), I am not angry or disappointed! I am quite happy with C2.



C2 has the possibility to post suggestions as a private message, but there it is said that they may be put on the forum anyway… I think this is a good idea, since other users may not agree with the suggestion (as in this case).



Anyhow, it has become clear to me from this discussion that I really need a margin account. So I’ve applied for one. This will probably cause a few weeks delay again :frowning: because I’ll have to send the paper forms accross the ocean.



Thanks for your suggestions, Pete and Eu!

Jules,

Would it be an idea to report (1) the % long trades and (2) the % winning trades and the average profit % per trade separately for the long trades?

Yes. It would be an idea. Separation of long and shorts in stats is quite normal. Anyway there is long list of suggestions for C2. It’s why it would be nice to see some schedule for new implementations.



BTW, I am not a native speaker; what does ‘lol’ mean?.

Sorry, I though that from my simplified babbling is clear that English isn’t my first language too. LOL - Lot Of Laughing. “crying” - internal C2 joke that isn’t related with you personally :wink:



I really need a margin account.

Yep. It’s for sure for stocks as well even if you won’t use it. You don’t need margin account if you play longs in reeealy long terms: weeks, months.



Eu

Jules … here’s a link with definitions for a lot of common internet abbreviations like LOL:



http://www.anapsid.org/internet/smileys.html#abbrev

Randy,



You’ve got me. lol There is old one “Lost Of Line”.



Eu

I always thought that LOL stood for “Laugh Out Loud” to give the reader some idea you are joking or otherwise just having fun with them (e.g. don’t take what I just wrote too seriously)

Pete,



don’t take what I just wrote too seriously

Your apology wasn’t accepted I have to complain to C2 owner that C2 didn’t defend me from my ignorance lol.

Of course no offense was taken. You’re correct and I can easy accept my mistake…hmm… once. (It’s why I bookmarked Randy’s link :wink: )



Eu



P.S. “Lost Of Line” is other story.