Tuesday, November 26, 2013

Math for Monday Night

Anyway, I spent the better half of the whole evening doing lots and lots and lots of mathematics and calculations in front of my computer the whole night. The rest of the night I spent watching Dr Who and reading controversial news, haha.

So, my first math problem was figuring out leverage. I spent probably almost 2 hours trying to figure out how to accurately calculate the following:
  1.  the current amount of leverage that I am applying to my indices trades, taking into account unused margin
  2. the amount of cash to top-up to the account to reach the desired levels of leverage
  3. the optimal conservative scenario which does not allocate cash efficiently
  4. the most efficient way of minimizing cash required to achieve desired amount of leverage
With that in mind, I have actually found out that my initial position today is NOT at X2 leverage, and my stop loss is about 30%, which is not what I would like.

With the new calculations and spreadsheet that I have made (located conveniently on the sidebar under 'S&P Market Timing'), I can now quickly calculate the amount of leverage, leveraged amount, unlevered amount to use and also the safety margin to prevent account close out.

I am currently at a horrible overleveraged at X7.7. But with the current use of my spreadsheet, I am hoping to slowly kick down that leveraged risk amount to under 3, but slowly adding in regular amounts every month. As long as the S&P market timing model advocates buying, I will be buying into dips that occur on the S&P when there is any excess liquidity to hit my targeted leverage levels.

So there goes the 2nd mathematics calculations that I have done for the night, which is deciding the amount of money to be allocated into my personal hedge fund (Don't Worry Be Happy) and how much to allocated into my S&P Market Timing Model.

I have come to the conclusion that I will be allocating my cash flow in a 60% equities / 40% bonds manner. This means that 67% of my monthly cash flow will go into my hedge fund, while 33% of into my market timing model.

So, if I have $1k of monthly savings, $600 will be heading into long term, while $400 into the S&P. For $1500, it will be a more clean $1000/$500 split. For $2k, it would be a $1400 and $600 split. I think that you can see that I am generally more cautious of my speculating and I'd much rather add savings into my hedge fund.

I aim to utilize only X2 leverage, unless in situations which very strongly suggests a bullish notion, may I amp up positions to X3, and look to make a quick profit to drop down my holdings. Likewise, in rather dubious and scary bearish scenarios, I will look towards reducing my leverage by realizing some profits and adding back to the cash base.

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