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validating a trade strategy
- Thread starter larrybf
- Start date
Quote from larrybf:
once again thanks for all the helpful feedback... a specific money management question. is 3x the exchange minimum margin requirements a good method to help prevent overleverage?? or is there another method to be used to safely fund a commodity account and still enjoy some leverage??
I have always found it useful to look at the size of the contract you trade. Not matter what how you put it, that's the capital/risk you've comitted. Maint margin is something the brokerage houses likes to keep low to entice you to trade more.
So put one ES at 50k. That's what you'd do if you were trading stocks.
Quote from vikana:
I have always found it useful to look at the size of the contract you trade. Not matter what how you put it, that's the capital/risk you've comitted. Maint margin is something the brokerage houses likes to keep low to entice you to trade more.
So put one ES at 50k. That's what you'd do if you were trading stocks.
Except that by doing so, you lose all your leverage. I think 3 times the maint margin is OK, but it depends on what you feel comfortable with. I personally trade stocks with a 30% margin, but futures with 3 times the maint margin.
Quote from larrybf:
once again thanks for all the helpful feedback... a specific money management question. is 3x the exchange minimum margin requirements a good method to help prevent overleverage?? or is there another method to be used to safely fund a commodity account and still enjoy some leverage??
Hi again Larry,
Although I realize that margin requirements for futures markets are a function of volatility, I personally do not consider the margin requirement as a factor in my money management. Rather, I just look at the amount I risk on each trade in relation to my overall account. Let me illustrate why margin considerations alone are not sufficient in arriving at an optimal money management strategy.
Suppose two different people each trade only one market, the Mini S&P 500 index, and that each trader has an account size of, say, $10,000. Let us also suppose that each trader only trades one contract. However, the first trader typically risks 2 or 3 ticks per trade, whereas the second trader's strategy requires that he risks 16 ticks per trade as calculated by the size of his required protective stop. So, in the first case, the trader is risking only 0.25% to 0.375% per trade. Provided that his strategy is a reasonable one (depending on his time frame and so on), his exposure per trade is quite low and very comfortable in relation to his account size. However, the second trader is risking $200 per trade, or 2% of his capital on each trade. Here the water gets a little deeper and the sharks a little less playful. Personally, I find that risking 2% of my trading capital on any one trade is just a little too exciting. Note, however, that the margin requirement is the same for both traders, assuming they both trade intraday.
My point is that the margin is only a starting point, if that. Your trading strategy is an integral component of your money management equation. Your money management strategy should take into account the amount you risk per trade as measured by your predetermined protective stop as required by your method. Of course, you should have other safeguards if you are trading multiple markets, and depending on your trade frequency. However, I think that those considerations are of secondary importance. Knowing in advance how much dollar exposure you are prepared to tolerate in relation to your account and where your protective stop should be will determine how many contracts you can trade. Assuming that your method has a "reasonable expectation" of making money over time, I think that the % risk should be a factor of both your trading time frame and your risk tolerance. My own rule of thumb: less is more. Happiness is undertrading.
Once again, this is just my 2 cents.
Regards,
Thunderdog
THUNDERDOG.... thanks again for the feedback. much appreciated... please explain one more thing....i am one of those traders who uses 2% as my stop out risk. i thought i was being conservative.... you obviously feel otherwise... i am not a hyperactive scalper so using tiny stops and targets just willnot feed me enough.. BUT if i am playing with fire.... please enlighten me..... thanks.....by the way i have never blown out an account so maybe that is the reason for my boldness/stupidity....
Quote from larrybf:
THUNDERDOG.... thanks again for the feedback. much appreciated... please explain one more thing....i am one of those traders who uses 2% as my stop out risk. i thought i was being conservative.... you obviously feel otherwise... i am not a hyperactive scalper so using tiny stops and targets just willnot feed me enough.. BUT if i am playing with fire.... please enlighten me..... thanks.....by the way i have never blown out an account so maybe that is the reason for my boldness/stupidity....
Hi again Larry,
There is no pat answer to your question. You will likely get as many different answers as the number of people who respond to your question.
In my case, I trade only the Mini S&P on an intraday basis, and I get a number of setups each day. I risk considerably less than 1% of my trading capital on each trade as measured by the size of the initial protective stop. Some years ago, I position traded a number of markets and risked closer to 2% per trade. I personally found it to be a bit on the high side. Some people risk more, while others risk less. I also recall when I first started to day trade the large S&P index in December of 1999. Although I had fewer setups than I presently have, for a brief and painful period, I actually risked about 2% per trade. I could not handle it. (Of course, it did not help that my method was not nearly as good as I thought it was.)
Larry, I realize that this does not help much. So here is what I suggest you consider doing to get an idea of how much you should risk per trade. You mentioned in an earlier post to this thread that you have one setup per day and that you have done well with your method this year. Assuming you have recorded your trades, look at the the general reliability of your method as measured by % wins vs. % losses, and the size of the average win as compared to the size of the average loss. These numbers are a starting point and are not set in stone, because they only describe the past. They will not predict your method's future. (Remember the comments in my prior post regarding probability vs. uncertainty.) Determine the maximum drawdown of your method in the past and the maximum number of consecutive losing trades. Going forward, assume it will be at least twice as bad. Having done that, try to come to terms with how much drawdown you can survive and are prepared to tolerate. This exercise should help you tentatively arrive at a reasonable risk size per trade. Essentially, the idea is to arrive at the maximum amount or percentage that you would comfortably be prepared to risk per trade going forward, based on your historic testing or actual results, and then risk LESS than that amount.
If you had the luxury of being able to assume that future performance would essentially equal past results, then you would not need this buffer. But you cannot realistically make this assumption, therefore, you must buffer against the uncertainty in order to survive. If you do not use such a buffer, you will almost certainly stub your toe in a bad way, falling over the inconveniently (and unexpectedly) fat tail of the distribution curve.
Again, this is just my opinion. Perhaps I am being overly conservative. However, I think most folks would agree that if you take care of the downside, the upside will take care of itself. Good luck.
Regards,
Thunderdog
Quote from electron:
Except that by doing so, you lose all your leverage. I think 3 times the maint margin is OK, but it depends on what you feel comfortable with. I personally trade stocks with a 30% margin, but futures with 3 times the maint margin.
My point was that margin is not a useful measurement of risk. Only the volatility of the actual postion is.
Maint margin is the risk the brokerage house is willing to take with the assumption that they most likely can liquidate your position without risking their capital.