How can I reduce my financing costs?

[hellokimchi]

(no 'GBP' key on my keyboard, so GBP=$ for reference)

After spending a LOT of time testing a trend following system, I've found it's main weakness - the financing costs are killing my profits.

The spead isn't a problem as my trades last weeks or months. But I understand if I take my system live, I'll be charged LIBOR+3% (9%) for longs, and be paid LIBOR-3% (3%) for shorts by CMC markets. Since I've tested the system primarily on international indices, most trades are longs.

If the Nik225 is trading around 17000 - and I buy $1/point I will be charged:

$1*17000*9% /365days = $4.19 per day for financing. = $125 per month....which really eats into the system's edge.

Here's a specific example from my system. I bought and held the Sydney market for 7 months in 2004/5 at around $5 per point (a much longer time frame than averagel). The trade increased my account by 25%, risking only 2% on the trade. The financing reduced my profit by around 30% - so the trade profit was only around 18%. The smaller winning trades are being killed by the financing.

I've been thinking about some solutions to reduce these costs. Please comment on my ideas and please add other suggestions if you can:

-reduce the holding period by making my trend following indicators more sensitive
-trade indicies with a lower points value - ie the S&P500 trades a lot lower than the 17000 level
-trade more volitile markets, thus reducing my position size and financing costs.
-CMC Markets charge Libor + 3% for overnight longs. Any other brokers offer a better rate?

How do you reduce your financing costs if you use a swing/trend following system that keeps positions for weeks/months?

 

[the blades]

(no 'GBP' key on my keyboard, so GBP=$ for reference)

After spending a LOT of time testing a trend following system, I've found it's main weakness - the financing costs are killing my profits.

The spead isn't a problem as my trades last weeks or months. But I understand if I take my system live, I'll be charged LIBOR+3% (9%) for longs, and be paid LIBOR-3% (3%) for shorts by CMC markets. Since I've tested the system primarily on international indices, most trades are longs.

If the Nik225 is trading around 17000 - and I buy $1/point I will be charged:

$1*17000*9% /365days = $4.19 per day for financing. = $125 per month....which really eats into the system's edge.

Here's a specific example from my system. I bought and held the Sydney market for 7 months in 2004/5 at around $5 per point (a much longer time frame than averagel). The trade increased my account by 25%, risking only 2% on the trade. The financing reduced my profit by around 30% - so the trade profit was only around 18%. The smaller winning trades are being killed by the financing.

I've been thinking about some solutions to reduce these costs. Please comment on my ideas and please add other suggestions if you can:

-reduce the holding period by making my trend following indicators more sensitive
-trade indicies with a lower points value - ie the S&P500 trades a lot lower than the 17000 level
-trade more volitile markets, thus reducing my position size and financing costs.
-CMC Markets charge Libor + 3% for overnight longs. Any other brokers offer a better rate?

How do you reduce your financing costs if you use a swing/trend following system that keeps positions for weeks/months?

Hello Hellocimchi,

If you're holding for weeks / months - why not trade the forward months (futures) contacts. Your financing will be much lower for these, at the cost of a slightly larger spread - but it will work out cheaper. For equities you're charged at LIBOR + 3% for rolling, and LIBOR only for futures. As the rolling price is really derived from the futures anyway, the movements will be tightly correlated so your performance shouldn't suffer.

I don't think you'll gain by trading indices at lower point values. The finance charged is based on exposure - so £10 per pt at "2,000" would incur double the finance charge of £10 per pt at "1,000".

Hope this helps,
UTB

PS - I use CMC, IG, Fins and Worldspreads. CMC are cheapest for equities and Worldspreads for indices (generally). You do need to consider the effects of credit. Fins, IG and WS offer credit so none of your money is ties up. CMC don't, so you're paying about 10% margin which is cash you could have invested elsewhere.

 

[TWI]

Don't use spreadbetters for this type of trading. Open an account with brokerage deposit margin and trade futures.

 

[hellokimchi]

Don't use spreadbetters for this type of trading. Open an account with brokerage deposit margin and trade futures.

I've only looked at spreadbetting when testing my system. Across various markets over the last 9 years the system has averaged over 20% per year including slippage/gaps etc.

When factoring in the financing, the return plummets to about 7%....cash ISA rates for a lot more bother.

Can you tell me how the financing is different for a regular futures account? I've looked at various sites but can't find any info.

I have GBP10000 available for trading - maybe not enough for a futures account.

I didn't realise spreadbetting futures only charge the LIBOR rate and don't add 3% onto that. I'll have a look at those too as I've been testing the rolling cash bets.

 

[capital]

Same for me too

hellokimchi
I've have the same problem too. I'd still like to know which Spreadbet Co's have the lowest funding charges.
Re your quoet
"When factoring in the financing, the return plummets to about 7%....cash ISA rates for a lot more bother."

You have to bear in mind that through the high gearing - the cash you otherwise would have had to stump up can be invested for a return. So the actual funding cost is the difference between the spreadbet funding charge and your alternative rate
e.g. £10k spreadbet investment (only say £500 margin required) - spreadbet funding cost is £10k x 9% - but you have £9.5k to invest at say 5% so the true marginal cost is approx 4% rather than 9%.

capital

 

[hellokimchi]

hellokimchi
I've have the same problem too. I'd still like to know which Spreadbet Co's have the lowest funding charges.
Re your quoet
"When factoring in the financing, the return plummets to about 7%....cash ISA rates for a lot more bother."

You have to bear in mind that through the high gearing - the cash you otherwise would have had to stump up can be invested for a return. So the actual funding cost is the difference between the spreadbet funding charge and your alternative rate
e.g. £10k spreadbet investment (only say £500 margin required) - spreadbet funding cost is £10k x 9% - but you have £9.5k to invest at say 5% so the true marginal cost is approx 4% rather than 9%.

capital

As I'm just starting off, I'm not worried about making big profits - just preserving my capital, practicing discipline, and learning the trading process. Much of this can be done with a practice account, but there's nothing like having real money on the line.

I'd actually just prefer a cash trading account with the flexibility of spreadbetting without the margin. I would opt for margin once I know i can get things to work without it. This would remove the financing costs. I haven't found a company that will allow me to trade an account and leave my full cash position value in the account to offset the financing costs. I doubt I will find such an account as this is a source of their income.

 

[pssonice]

"the financing costs are killing my profits."

wrong. u ve a quiet different problem.
u dont have an idea how to play this market.

 

[the blades]

As I'm just starting off, I'm not worried about making big profits - just preserving my capital, practicing discipline, and learning the trading process. Much of this can be done with a practice account, but there's nothing like having real money on the line.

I'd actually just prefer a cash trading account with the flexibility of spreadbetting without the margin. I would opt for margin once I know i can get things to work without it. This would remove the financing costs. I haven't found a company that will allow me to trade an account and leave my full cash position value in the account to offset the financing costs. I doubt I will find such an account as this is a source of their income.

I'm not sure I understand your problem - I get a higher rate of interest from my bank (via offsetting) than I'm paying my SB company for financing (I've tried to explain above). I'd run through the numbers again using quarterly bets, and re-evaluate what you're doing with the money that is freed up by using margin.

Cheers,
UTB