Leverage is key to understanding a strategy and yet it is not clearly identified or quantified by C2. The best way to do this would be to add a sub chart under the performance chart which shows gross leverage. (In fact you could also add a button to switch it between gross and net leverage.)
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This would for example make martingale strategies very obvious in one glance at the chart.
I absolutely second this notion. Some type of understanding of leverage utilized by each strategy would be extremely valuable.
Leverage is a little difficult to quantify, especially in futures, due to the varying volatility of each market. A better metric would be the volatility or standard deviation of each system, expressed as a percentage of account size. Subscribers often get into a program with greater than expected volatility and then bail out at the first small drawdown. Scared money never wins.
I think leverage would be a great visual to add the charts as long as the futures systems take into account the unit or multiplier size when calculating exposure number. If you want a volatility measure why not use standard deviation or sharpe ratio? Both of these are already available for each system in the statistics tab.
I am not quite sure what this means. How would you define leverage? In futures, CL is 3.0% volatility, ES is 1.3% and EC is 0.8%. Also, contract sizes vary. I don’t have volatility for stocks, but how would you compare AAPL, TSLA, and JNJ in a cash account. I think standard deviation should be the measure. It is part of Sharpe, which should be used to judge risk adjusted returns. But, we are just discussing risk assessment for a new subscriber. I favor Sharpe or Sortino for all subscribers to fairly compare systems.
All I’m saying is I think leverage calculations should take into account the actual value of the holdings not just the cash or margin required on a futures contract.
Why not show volatility on the system rather than the individual holdings? I think making any kind of volatility adjustments for the actual account holdings of the system would get overly complex and seems unnecessary. Over a long period that volatility will show up in the drawdowns and various other measures already available at the strategy level.
I think they are asking for a simple measure of leverage on the account which I tend to agree is a good idea. This of course should be combined with other measures when reviewing a system.
Thoughts?
I think you may be saying you use volatility to derive your trade size. Is that right? I think they are asking for the result of that calculation. What is the actual value of that trade combined with all other current holdings for that system as a percent of the account value. Correct me if I am wrong.
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I am not disagreeing with you. We do need a measure of system volatility, preferably Standard Deviation. I do calculate volatility for each futures market, which is important for risk management. A subscriber should only care about total portfolio risk relative to account size. Standard Deviation is already being calculated by C2 as part of calculating Sharpe. Why not display this number prominently on the account page and tabulated in the Grid?
Totally agree, these measures could be added to the account page in a more prominent way.
But I still think it would be an interesting measure to see the value of the trades being made as a percent of the account value. I’m guessing the opposing argument is that these trades could be hedged or not be on volatile instruments and therefore give misleading information. That’s probably a fair point to consider. But it seems to me that could be explained and the benefit of the additional information outweighs the effort to explain. Maybe that’s just me because I wouldn’t have to explain an extreme measure where futures guys would. Happy to get your thoughts as a futures trader. I would guess that most traders on C2 are not taking volatility as a measure of their size. When you see big trade size it’s more a function of wanting to get big returns to attract subscribers rather than some rational thought and calculation of the appropriate level of volatility and size. What do you think?
I do not agree that “leverage is a little difficult to explain”. The calculation is simple: Leverage = Exposure / Equity. Volatility is a completely separate thing. That could be requested as another sub chart if you like.
Agree with above and also agree that this would be useful to see on the system charts.
Your example only applies to your system trading one market. What if you also were trading Japanese Yen. Then one contract (approximately $100,000) would be 167% leverage based on your $60,000 account. The risk of one Yen would be considerably less than the risk of roughly 4 contracts of your mini Hang Seng. The “leverage” would be the same.
Applying your calculation of leverage across the spectrum of Collective2 would be difficult and confusing. Why not just use Standard Deviation, an established statistical measure?
Again, my post is just about the request for a leverage sub chart. I agree that leverage is not the “be all and end all” of risk. It is just one figure that is very useful - in particular to see how it changes through time and relates to returns, for example it makes martingale strategies stick out like a sore thumb. On the other hand your preference for showing volatility will often completely miss highlighting a manager who kept doubling down to make it back. In the end you have to figure out your own way to measure risk because there is no right way.
