I have talked quite a lot on Twitter about a new Index Spreadbet System that I have been designing for about a month, and I have had long discussions with several friends regarding what the faults are and ways it can be refined and improved.
My intent was to produce a detailed Blog about the System and to includes loads of Examples of it in practice, but with my Health niggles that is too difficult at the moment, and for now I have just bashed something together quickly based on some email discussions with mates. The attraction of the System is that it is expected to generate in the region of 40%+ CAGR on the Initial Capital Employed and a higher ROCE based on the Average Capital used. In addition, it has controlled and limited risk and for most of a given year, we do nothing whatsoever – in fact, my biggest potential flaw that has been spotted is that if we Hedge too often, then the Returns will be reduced.
I have only been able to come up with this System because of my obsession with Hedging in recent years and I knew it would be extremely important and now I understand why. Readers etc. must have thought I had gone totally off my trolley in recent years as I have struggled to master Hedging effectively, but it seems highly likely that learning is going to pay off for me big time. I didn’t realise it at the time, but literally in the last month I have come up with what I think is potentially a highly effective, simple System with a tiny amount of effort needed; and yet with Controlled and Limited Risk.
On top of a 40%+ CAGR Return, 75% of that Profit will be Cash I can take out of the System each year. Two other factors that help the System are the recent introduction of the ‘Force Open’ function on Spreadbets (which enables you to run a Long on the FTSE100 at the same time as a Short on the same Index for example) and the change to the Rules regarding Retail Investors under ESMA legislation, means that the potential Loss is limited; and such an event would be extremely unlikely if we follow the Rules of the System. I dreamt up this System because I realised that my Portfolio of Long Spreadbets (I run a ‘mirror’ of my Normal Shares as Spreadbets to get Leverage), behaves like the Index. When the Markets are up, my Spreadbet Portfolio is up. When the Markets are down, my Portfolio of Spreadbets is down. I realised there is a close correlation and that in theory I could just replace all those Long Spreadbets with one simple FTSE100 Long Spreadbet that runs forever……… Here are the highlights:
Anyway, I intend to start with a Test System very soon (in the next few days I hope) and a close mate has already started with him using the S&P500 which will give us a useful comparison. I will most likely talk about this on a Podcast soon and if you are champing at the bit to get going, then I suggest you listen to the Spreadbet discussions we had in Podcasts TPI 47 and TPI 48 and that should help your understanding. Also read my Spreadbetting Blogs. As a quick example, I expect a System with £100k Exposure to generate a Profit of about £5k or more; and of this Yearly Return, you could take out 75% as Cash (about £3750) and this is conservative. Of course, the Returns will vary and some years it might even lose a bit of money, but on others it will generate a Return of perhaps £15k. It is important that the Rules of 5% Margin Deposit (you have no choice with that) and 10% Cash Buffer minimum in your Account and 10% Emergency Buffer elsewhere but with fast access, are always obeyed and that this is however much your Long Exposure grows. This is why you can ‘only’ take out 75% of a Profit as Cash but note if you were to stop doing the System, then the Money is all yours. And remember that for most of a year, we are doing absolutely nothing and just focusing on any need to Hedge – which must be rare. I have said this lots but I will reiterate. The simplest way to measure the value of your Spreadbet Account is to add your Margin Deposit to your Cash Available – keep it simple. Under ESMA Rules the most you can lose if things go terribly wrong (this is highly unlikely because the Markets now have ‘Circuit Breakers’ which suspend trading if Markets fall too fast and they give a pause to allow Traders to come to their senses), is your Cash Buffer (so 10% of Long Exposure is always the minimum but you must take any big excess out of your account – which is dead easy) and then at below 50% of your Margin Requirement the Spreadbet Company will Close out your Long Index Trade. You don’t want this to happen and it is avoidable. With the Emergency Buffer, my System can cope with at least a 22% fall in the Markets before you have a problem. Such falls are extremely rare and the System has Hedging built in to avoid such a disaster hurting you. Anyway, I will start the Test System very soon and I will report back on it at least on a Weekly basis, probably via Twitter or in my Weekend Blogs. I will test with £3 a Point on the FTSE100 which will give a Long Exposure of about £21,000 and need 5% Margin Deposit (£1050) and 10% Cash Buffer in my Account (£2100) and then 10% Emergency Buffer in a Bank Account that I can get to pronto if I need to. I will test for about 6 months and if I am happy, I will scale up for 2022. The Test might actually highlight some small refinements. At the start of each year I will write down Rules and Parameters for the next 12 months. It is dead easy to move Cash between your Bank Account and a Spreadbet Account – in both directions. I regularly do it from my igIndex App on my Tablet and thankfully I am mostly taking Cash out at the moment !! My Test System will be £3 a Point on the FTSE100 which as of tonight, with the FTSE100 being at about 7134, means my Long Exposure would be £21,402 (£3 x 7134) which means 5% Margin Deposit is £1070 (5% of £21,402) and my 10% Cash Buffer is £2140 (10% of £21,402) and my 10% Emergency Buffer is the same. Because the First Short should be about 15% and the Second one also, £3 a Point is the smallest you can sensibly go to test the System. This is because you can Short £0.50 a Point (well, I hope I can because I used to see that was the minimum !!) which means the First Short would be 16.6% (0.5 divided by 3 as a %). If you do £2 a Point, the smallest Short you can do is 25% which is unrepresentative of a scaled-up, bigger, System. And another beauty is that the System is entirely scalable. If it works on £21,000 of Exposure, it will work on £21million !!! Nuts ‘innit? WheelieBash 2021 We have determined that The WheelieBash this year will take place on Saturday 4th September 2021 at The White Hart in Winkfield near Windsor as usual. I am allowed 60 peeps and so far over 20 Slots have gone. It is Free to attend and if you want to come then email me or DM me on Twitter or whatever. If you go to the relevant page on my Website (I think it is on WD2) then you can see all about WheelieBashes from previous years. Last Week Turned out a lovely day on Friday (even better because I was out helping a mate’s Son buy an MX5 like mine, followed by a trip to the Pub) and as a result my Week ended with my Portfolio up 1.2% and hitting a new All Time High. I think the Income Portfolio did ok as well. Happy days. No change to Strategy – I am pretty much doing nothing and just looking for opportunities to Hedge, but I doubt that will be needed until August at the earliest. The Spreadbet Blogs These are from the ‘Blog Index List’ page on WD2: https://wheeliedealer.weebly.com/educational-blogs/how-to-use-leverage-safely-and-successfully-spreadbetting-and-cfds-part-7-of-7 There are Links at the bottom to the first 6 parts. These are about Hedging: https://wheeliedealer.weebly.com/educational-blogs/yet-more-thoughts-on-hedging That one has Links at the bottom to others on Hedging. Latest Podcast TPI 50 We should be recording a new Podcast this week and that should emerge for next weekend. In the meantime, here is how to find TPI 50: Anyway, as usual, if you go to the ‘Conkers Corner’ Channel on the Major Podcast Platforms (and a lot of minor ones !!) then you can find the full Archive of the 50 Podcasts there and you want TPI 50. You can listen to it on SoundCloud or YouTube at the Links below: https://www.youtube.com/watch?v=2qUTFQnDHdA https://soundcloud.com/user-479955511/conkers3-wheeliedealer-50-special-guest-khc-bhp-bmy-pets-pmp-lgen-tek-bell-invp-ftse Brent Oil Composite All the Charts I show are taken from the excellent SharePad software I use and if you click on the images then they should get a bit bigger on your screen (I recommend you read these Blogs on a big screen rather than just a Fone – there is a lot of detail to be seen). I know some Readers actually look at their Charts on SharePad or whatever method they use as they read through my blogs. If you fancy using SharePad or ShareScope yourself, then you can get 1 month’s Free Data if you go to the ‘Subscribe’ page on their website and then select the Product you want, and then you should see a ‘Promo Code’ box and if you type ‘twinpetes’ into that box, then the discount will apply. You can also get this by clicking on the Adverts that are all over my websites. I get a small payment for introducing you, so thank you very much !! (it’s just a shame I can’t spend it on beer at the moment…..) https://www.sharescope.co.uk/ I noticed also that SharePad/ShareScope have updated the landing page on their website and there is much better detail regarding the capabilities and features of their software now. In fact, Podcast TPI 50 contains a discussion with the Founder of SharePad/ShareScope, Martin Stamp. Highly recommended. I will look quickly at the Chart for Brent Oil Comp because it can affect the FTSE100. The Chart below has the Daily Candles and the first thing to note is that where my Blue Arrow is, we had a ‘Bull Cross’ between the Black 13 Day EMA Line (Exponential Moving Average) and the Red 21 Day EMA. This is still in force and implies more upside. My Black Arrow is pointing to a Doji Candle from Friday and obviously it was a choppy day but that is normal in the low volume summer months. There is Resistance at $73.1 from Friday and then up to $75 and on to $86.7. To the downside, there is good Support around $70 and down to $64.
In the bottom window on my Screen below we have the RSI (Relative Strength Index) for the Brent Oil Comp Daily. On a Reading of RSI 69 where my Arrow is, this is very high but it can go higher – as you can see to the left.
FTSE100
Because I will be starting my New System on the FTSE100 I am particularly eager to look at these Charts, although I suspect there is not much to be too concerned about. My Chart below has the Weekly Candles for the FTSE100. My Blue Arrow is pointing to a nice small Up Candle from last week and this looks fine. It is behaving well within the Uptrend Channel marked by my sort of Pink Lines (Pink Arrow etc.). There is immediate Resistance at 7164 and a Breakout over that would be good. Up above we are talking 7200 to 7800 and then on to the ATH which I think is just above 6900. A Breakout above the ATH would be hugely Bullish. To the downside there is Support at 6800, and 6600 to 6200, so it is well supported. Remember I talked about a 20% Drop on the FTSE100 being designed into my New System? – well, that would mean a fall down to 5700 which would be quite a move. Of course, I would be Hedging before we got anywhere near that.
No problem with the 13 and 21 Day EMAs and these are Bullish as per my Chart below for the FTSE100. The Green Ellipse marks the Resistance at 7164 and Friday’s Candle was big and Bullish.
This is interesting. Despite the nice moves up, the FTSE100 Daily RSI in the bottom window on my Screen below is still only at RSI 62. This is not high and can rise a lot more.
Next it is the Weekly RSI in the bottom window. This time it is also RSI 62 and that suggests there is room to rise more. This fits my ‘most likely’ scenario that the Markets rise through the Summer but could be troublesome in the Autumn.
I would actually like this because it would give my New System a good stress-test if we get a decent sell-off. I was going to wait until after the Autumn but I figured a drop would actually be a proper validation of the System and help me refine the Rules. On top of that, I am keen and eager to get going !!
I’ll leave it there but no doubt I will be Tweeting any updates in the evenings of how Charts are shaping up.
S&P500 Well, that’s a misleading headline if ever I saw one !! For Enthusiasm, Health and Time reasons (probably in that order), I am not going to cover the S&P500 tonight (sorry M). It turned out I had a lot of text to add to the description of the New System and with the US Markets up near All Time Highs, there is not much to worry about. Anyway, going forwards I intend to write a Blog which includes loads of Examples of my New System working in practice (you know the sort of thing, more Scenarios really such as; What happens if the FTSE100 falls 30%? What happens if the FTSE100 rises 10% etc. etc.) On top of that, the Rules for my System are implicit from my comprehensive description up above and from what I have put out on Twitter in recent weeks, but I do think it would be a good idea to create Blog that just has the Rules of the System in clear terms. I am a long way from a decision and it depends on how well the 6 month Test System works. However, my suspicion is that I might be well advised to Close all my Long Stock Spreadbets and to entirely move to this ‘pure’ and simple System. OK, maybe I could run both FTSE100 Longs and S&P500 Longs with perfect Hedging on both – but that is another decision entirely, but it has some sophistication. My Mirror Spreadbets probably give higher Returns on Exposure than a simple Long on the FTSE100, but the Margin requirements are much higher and that probably impacts the Return on Capital Employed. It could also be the trade-off that the simplicity and minimal effort of my New System, makes it far superior. Oh, and apologies if my System description waffles like hell and repeats itself. However, it is a half-hearted apology because I don’t think it hurts for me to reiterate many key elements of my System. Anyway, that’s it for this week, don’t ‘work’ too hard and hopefully the Sun will be looking down brightly upon us. Cheers, WD.
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