# of contracts in regards to capital/profit target?

[chrisdunn]

Quote from pclark:

OK,

Thanks for the help on my previous post about stops. I have pretty much decided to use mental stops while trading the ES due to volatility but will put a stop in way down the line in case of disaster. Now I have another question.

My account is 11K using Ninja Trader and Mirrus/Zen Fire. The way I paper traded the ES is 4 contracts at a time and my profit target is 2.25 points and then I am out. The reasoning is the longer I am in the market the more risk I take on. I average about 6-8 trades a day and I hve been around 76% for accuracy.

So, using the above information. When I start trading w/my funded account. I thought I would do a trade or two w/one contract to see how the response is but then I wanted to start using 4 contracts. Using 4 contracts I think I can get the profit I am wanting and hoping to keep the same success rate. I know things tend to change when you start trading for real but assuming I keep the same mindset am I going to die a slow death? The way I have it figured w/commisions and slippage I should be able to do about $800 minimum. Also before anyone starts killing me about lofty idea's I know there will be day's where I don't do nearly that much.

Are there any suggestions? Thanks....

Paul

Have you sim traded? I recommend you paper trade until you can build a track record of success. I see people all the time who are too anxious to make money and end up losing big time.

Once you go live, trade with just 1 contract to get a feel for real fills. Do a couple weeks until you're consitent with that, then go 2, 4, 8, 10, 14, 18, 20.

Also, don't set targets based on points or $. Once you start thinking about MONEY, you're done. Set targets based on technicals (fib extensions, retracements, ect).

Feel free to visit my blog. Could help you out...

http://chrisdunn.typepad.com/blog/

Chris Dunn

 

[MGB]

Quote from vita:

3) alternatively, if you know the hit ratio of your setup, i.e. percentage of successful trades, and the risk-reward ratio (win size to stop loss) based on your track record. You can use Kelly's criteria as follows:

Margin To Equity (MTE) = P - (1-P) / RR
P: is the hit ratio
RR: is the reward to risk ratio.

For example if your system has 60% winners (P=0.6) and your win size is twice as your stop loss (RR=2),
MTE=0.6-0.4/2=0.4,

If your broker requires a margin of 3k/contract, you need a capital of 3k/(MTE)=3k/.4=7.5k

Using the formulas above, once you've calculated your MTE, you can calculate how many contracts you can trade based on the size of your capital.

Contracts to trade = ( MTE * Capital ) / Contract Margin

For example:
1) MTE = 40%
2) Capital = $20,000
3) Contract Margin = $5,000

1.6 = ( 40% * 20,000 ) / 5,000

In this case, I round down to 1.0 contract to trade.