Quote from OddTrader:
http://www.elitetrader.com/vb/showthread.php?s=&threadid=125461 :
So often we can read so many times on ET people asking and saying about "risking a loss of max 1% of risk capital per trade."
However, we still don't know how much (% of risk capital) should be deployed/used in order to attain this objective (max loss 1%).
imo, there would be an optimal % of risk capital should be deployed/used to control the max loss per trade. But this optimal deployment % seemed seldom discussed, as far as I know. (Actually a kind of hiden operational risk!)
Basically my understanding (based on previous readings about money managers) has been professional investors don't like their total amount of risk capital in their accounts to be over-deployed nor under-deployed.
"The vast majority of CTAs trade position sizes with margin requirements of lass than 50 percent of the acount size. Therefore, in most cases, it is not necessary for a managed futures account to be fully funded.- Schwager (Managed Futures - Myths & Truths)"
That, imo, would be one of the main reasons how managers/investors determine their notional funding of nominal acccount sizes.
Just my 2 cents as notional (not 20 which is too much)!
BTW, what is actually a single Trade, and how people individually define it anyway!?
This highlights the difference between investing and trading.
An investor basically relies on the ability to identify long-term trends. It is assumed that there are always identifiable trends in mutiple intruments. So, the question is reduced to how to allocate capital between these instruments (some of which may calendar spreads or iron condors etc, not necessarily a simple security though most people think of investment as going long equity shares). A prospective investmnet instrument is in one of the 4 states (from the subjective view of an investor): 1) there is no identifiable trend; 2) there is a potential for a trend starting; 3) there is an established trend; 4) there may still be some styrength left in the trend but we missed the train. Because it's note necessary to enter a position in stage 2) and stage 3) is long in trending markets, it is possible to re-allocate capital between instruments over time...
Allocation of capital between trending instruments is a well-explored topic and there is lots of books on it. Some deeply mathematical. The risk here is viewed as the volatility of the investment portfolio, whihc in turn is dependent on how correlated the components of the portfolio are. If the instruments are perfectly correlated, it is like investing in a single intrument. On the other hand, if they are uncorrelated, the volatility of teh portfolio is greatly reduced by investing in multiple instruments.
So, if substantial part of the capital is not allocated, an investor thinks the money isn't working and can be deployed elsewhere. To investor this means the investment manager has run out of investment ideas.
In trading, on the other hand, the edge is in timing rather than selecting the right instrument (stock-picking). Lots of traders trade just one instrument (like S&P 500 e-minis). It is common to have no positions open for some time (in fact, daytraders keep no positions overnight).
A question of allocating risk only appears when a trader trades a large number of different instruments or a number of different set-ups in the same instrument. In fact, larger hedge funds and investment banks, which have multiple traders independently trading multiple strategies, often use techniques similar to those for large equity portfolios (as described above) to quantify and allocate risk.
Quote from OddTrader:
"The vast majority of CTAs trade position sizes with margin requirements of lass than 50 percent of the acount size. Therefore, in most cases, it is not necessary for a managed futures account to be fully funded.- Schwager (Managed Futures - Myths & Truths)"
In futures, 50% actually sounds like way too much leverage. As a benchmark, if 100% of the account was used for a margin, after one lossing trade, however small the loss, the capital would not be sufficient to open another trade (in the same size). So, allocations close to 100% which we see in long-only unleveraged funds, are totally meaningless when applied to futures margins.
