Three items of importance to note about the formulas for Figure 26.6 are that
even though a trade is signaled on a one-share basis in columns L to P, in Figure
26.3, a trade still might not take place if all the money already is tied up in other
trades. Second, if the fis so high that the amount of capital needed to buy the
shares specified by fisn’t available, we will buy as many shares as possible, given
the money at hand, not already tied up in other positions.
Third, because all signals and trades are recorded at the end of a trading day,
there is no way to tell the true intra-day order of the trades in case the system gave
several signals in several markets during the same day. Therefore, the best com-
promise for our analysis is to split the money between these signals.
For example, if, at the end of one day, we have $30,000 available on the
account (not already tied up in any trades), but also three new signals, each one
asking for $20,000 from the available money, we will give each new signal
$10,000. After this, the available money will be zero, unless we have no closed-
out trades, which will transfer to the account the exit price of that market, multi-
plied by the number of shares in the closed-out trade.
Last, we need to calculate the combined result from all trades, open and
closed, on a daily basis, to find out how that will affect our portfolio as a whole.
This is done in columns AF to AL in Figure 26.7. First, we need to calculate the
number of new signals we have each day, so that we know how to divide the money
among them, according to the rules just described (column AF). Once that is done,
the account equity for each day is calculated as the previous day’s equity, plus the
change from one day to the next in the open profit or loss for all open trades, plus
the closed-out profit or loss from all trades closed out that day (column AG).
The available equity, in column AH, is calculated as the total equity, in col-
umn AG, minus the open profit or loss (column T, for Market 2), minus the initial
amount tied up in all open trades (column R, for Market 2). The daily percentage
fluctuations in the total equity are calculated in column AL. To calculate the draw-
downs (in column AJ) and flat times (in column AK), we first need to calculate the
latest equity top in column AI.
The formulas for this specific spreadsheet and Figure 26.7 read as follows:
To calculate the number of new entry signals, in cell AF11 type:
IF(AND(B11<>B10,B11>0),1,0)IF(AND(L11<>L10,L11>0),1,0)IF(
AND(V11<>V10,V11>0),1,0), where columns B and V denote the entry
price for Markets 1 and 3, respectively. (Markets 1 and 3 not shown.)
To start the portfolio equity calculation, in cell AG10 type: C2.
To calculate the portfolio equity, in cell AG11 type:
AG10SUM(J11J10,T11T10,AD11AD10)SUM(K11,U11,AE11),
where columns J and AD denote the open profit or loss for markets 1 and
3, respectively, and columns K and AE denote the closed-out profit or loss
for markets 1 and 3, respectively.CHAPTER 26 Dynamic Ratio Money Management 317