Hi there, just wondering if anyone could advise;
Does PRT backtesting allow for the cost of overnight funding to be taken into account? or would i have to rely on excel to do this?
here are my thoughts:
Current IG overnight funding rate = libor ( 0.8% ) + 2.5% pro rata = 0.33%
Based on my own swing trading (equities) this equates between £5-6 per month per £100 risked (R). Clearly the longer i’m in the trade the more the funding cost increases and my expected return. If I am seeking to optimise my Risk:Return ratio (RR) then
E using prorealtime = pRR – pR
E in the real world (or excel) = p(RR-(tN*0.33%)) – p(R+(tN*0.33%))
Complicated way of saying, funding hurts me whether i win or lose, and the RR curve will be skewed to the left by the cost of funding. At some point there will be threshold where it’s cheaper to buy the futures trade than the DFB. Clearly buying the security for cash is also an option but this doesn’t allow the leverage i’m looking for.
This problem can be overcome in Excel so i was just wondering if others had gone through the same process (or if there is a smarter way to do it)? Happy to share my spreadie with those who would be interested.
As this is in the ProOrder forum I am guessing that you want to auto-trade. Back testing only allows you to increase the spread or add a set amount per trade and as you have no way of knowing how long the trade will be open for this is obviously not a very accurate way to simulate costs. It is not very difficult to write a bit of code that checks if you are on the market at the end of the day or at 2200 and deducts a set amount from an equity calculation. This is more accurate but still not perfect.
We have discussed auto trading futures in the forums before and there are some issues at roll over that make it impractical via ProOrder. At roll over the instrument closes and the trade cannot be moved on to the new instrument by PRT so the trade is just left in limbo and either closes or stays open at whatever profit/loss it was at at the time of roll over depending on your platform settings.
Generally DFB’s are fine cost wise if the position is only held for a few days to maybe a week or so – after that futures contracts become more attractive. I would suggest only trading DFB’s using PRT ProOrder and manually trading futures via IG’s platform if you need to trade futures. Spread betting was really only ever meant to be for short time holding of trades and does not adapt well cost wise to longer trades. If you are thinking months then I would buy an ETF but then you don’t get the leverage.
