All this talk about leverage just makes no sense to me. We have to look at the trade stats of the trader, and then given these parameters, we can figure out what size of account he needs.
Its just like looking for a place to live. You start with looking at the makeup of your family. Is it just you? You and the wife? Maybe 2 kids so a family of 4? Will there also be in-laws? This question would answer if you can live in a bachelor apartment or if you need a 4 bedroom house with a separate 1 bedroom basement suite which has its own kitchen and bathroom.
So we look at @sstheo 's trades. We see that he generally has an average win of 10 points. Some trades maybe go to 20 points. We see that is stop is also 10 points. We see that his largest string of losses is maybe 5 in a row, but this is compensated by a string of 8 wins in a row. (I'm just pulling this example out of a hat)
Now we also take into account this volatility. So we see that he needs to increase his stop to 20 points, but this should also mean he increases his target as well. By doing this, dropping the number of contracts by 50% would help keep things equal.
So now we see that given all of these parameters, he makes anywhere from $50 to $200 per day, and his worst losing day is $100. Let's even say he had 2 days in a row where he lost $100. But this would be a rare event if he continued to take trades as he should.
Putting all this together, we arrive at an ideal account size. I think for most people, their accounts are much too big. A guy trading a 100k futures account but making only $500 per day feels good because his equity only goes up and down 0.5% per day lets say, but we can all agree that 80k of that account is unnecessary. Its only there to make him feel good, but it in no way adds to his ability to trade. He could have only 20k in the account and trade exactly the same. The leverage seems like its higher with a 20k account, but it should make no difference to his ability to put on a trade, unless of course he gets 20 losers in a row.
@canoe , you have to remember that he is the one who put this 2% stipulation on himself. He has drastically scaled back his trading because of a psychological issue, not a stats issue. He himself said that he can trade 8 micro contracts in the account now, and yet he is only trading one. Even before this volatility picked up, he still wasn't trading the amount of contracts that he said he would.
Now don't get me wrong, I'm really inspired by his success and think he is doing wonderfully, but its obvious to me that the psychological element is already creeping in, and he will in no way reach his goals because already at these small values, he is scaling back due to fear. If he fully trusted his trading and his stats, he would have no trouble trading 4 micros right now. He finished these past few days all positive, and the PnL should really have been 4 times what it was because he should have been trading more contracts.
But I do also agree that for the benefit of emotional peace, he needs to scale back in this environment. There is no point in taking a big hit and starting all over again. But it just shows that this experiment will fail because the premise is already invalid. He made 2% not because of his ability to trade more contracts, but only because of the increase in volatility. When volatility dies, he will have to really ramp up the contract count to compensate. But if the fear is here now from watching the PnL go up and down quickly, it will be exactly the same when he is trading 4 or 6 contracts.
Going up and down $100 in seconds is the same if trading 5 contracts but its moving slow, or trading 1 contract when its moving fast. Its the fear of the money aspect of losing $100 in seconds that gets you. This is what gets everyone when they scale up. The problem usually isn't the strategy, its the scaling part, and he has already cut back on the scaling part, so its obvious that his fear issues will dominate this experiment. (I'm not saying I can do any better, but I'm just saying that I can identify it clearly)
Its just like looking for a place to live. You start with looking at the makeup of your family. Is it just you? You and the wife? Maybe 2 kids so a family of 4? Will there also be in-laws? This question would answer if you can live in a bachelor apartment or if you need a 4 bedroom house with a separate 1 bedroom basement suite which has its own kitchen and bathroom.
So we look at @sstheo 's trades. We see that he generally has an average win of 10 points. Some trades maybe go to 20 points. We see that is stop is also 10 points. We see that his largest string of losses is maybe 5 in a row, but this is compensated by a string of 8 wins in a row. (I'm just pulling this example out of a hat)
Now we also take into account this volatility. So we see that he needs to increase his stop to 20 points, but this should also mean he increases his target as well. By doing this, dropping the number of contracts by 50% would help keep things equal.
So now we see that given all of these parameters, he makes anywhere from $50 to $200 per day, and his worst losing day is $100. Let's even say he had 2 days in a row where he lost $100. But this would be a rare event if he continued to take trades as he should.
Putting all this together, we arrive at an ideal account size. I think for most people, their accounts are much too big. A guy trading a 100k futures account but making only $500 per day feels good because his equity only goes up and down 0.5% per day lets say, but we can all agree that 80k of that account is unnecessary. Its only there to make him feel good, but it in no way adds to his ability to trade. He could have only 20k in the account and trade exactly the same. The leverage seems like its higher with a 20k account, but it should make no difference to his ability to put on a trade, unless of course he gets 20 losers in a row.
@canoe , you have to remember that he is the one who put this 2% stipulation on himself. He has drastically scaled back his trading because of a psychological issue, not a stats issue. He himself said that he can trade 8 micro contracts in the account now, and yet he is only trading one. Even before this volatility picked up, he still wasn't trading the amount of contracts that he said he would.
Now don't get me wrong, I'm really inspired by his success and think he is doing wonderfully, but its obvious to me that the psychological element is already creeping in, and he will in no way reach his goals because already at these small values, he is scaling back due to fear. If he fully trusted his trading and his stats, he would have no trouble trading 4 micros right now. He finished these past few days all positive, and the PnL should really have been 4 times what it was because he should have been trading more contracts.
But I do also agree that for the benefit of emotional peace, he needs to scale back in this environment. There is no point in taking a big hit and starting all over again. But it just shows that this experiment will fail because the premise is already invalid. He made 2% not because of his ability to trade more contracts, but only because of the increase in volatility. When volatility dies, he will have to really ramp up the contract count to compensate. But if the fear is here now from watching the PnL go up and down quickly, it will be exactly the same when he is trading 4 or 6 contracts.
Going up and down $100 in seconds is the same if trading 5 contracts but its moving slow, or trading 1 contract when its moving fast. Its the fear of the money aspect of losing $100 in seconds that gets you. This is what gets everyone when they scale up. The problem usually isn't the strategy, its the scaling part, and he has already cut back on the scaling part, so its obvious that his fear issues will dominate this experiment. (I'm not saying I can do any better, but I'm just saying that I can identify it clearly)
