How many contracts should I trade using this method?

Discussion in 'Risk Management' started by Chuck Krug, Jul 4, 2011.

  1. How many contracts should I trade using this method?

    Account size: 100k euro
    Instrument: Eurostoxx 50 futures
    Initial margin: 1347 euro
    Maintenance margin: 1078 euro
    10 euro per point

    Method: stoploss 6- 8 pts
    Max times of stop hits: 4 consecutive
    Commission for a round trip: 6 euro/ contract.
    Avg net profit per contract per month: 1091 euro
    Percentage of winning trades: 58.97%
    Nr of trades per day: 1.95
    These are live trading results, trading 4 contracts with 3 profit targets. 2 are closed when/if T1 is hit, and 1 is closed at T2 and 1 at T3.

    Let me know if I forgot anything.

    Was planning on trading with 5 contracts, but I think this is not enough, and I should trade more to maximize gains.
    Method is traded manually to start with.
    All I can say is that entries, exits and stops are generated using proprietary algorithms.
  2. I'm sure there are lots of possible answers, but one of the calculations I would do is the following:

    position size
    = % of account to be allocated to this strategy /
    (total margin requirement per contract + "max expected peak-to-trough drawdown per contract")

    "max expected peak-to-trough drawdown per contract" = biggest drawdown per contract you have experienced so far (as long as you think your prior experience with this strategy is a good measure of how it could perform going forward?) + a margin of another say 50% - 100%, to reflect the fact that the worst you will experience will be worse than what you have already experienced (Sod's law).
  3. thx for your reply abattia.
    so your are saying
    100k/ 1374 + (320euro x2)
    = 49 contracts
    don't think my client could stomach your worst case scenario drawdown = 31360 (31.36%)
  4. That doesn't look right ... which means my explanation wasn’t clear enough ...
    From your original numbers it looks like:
    total margin requirement per contract = 1347€ + 1078€ = 2425€

    "max expected peak-to-trough drawdown per contract" is not the same as max losers in a row x stoploss.
    It’s the depth of the biggest trough you have had so far in your p&l (normalized for the number of contracts) while trading the strategy (e.g. it might have come from 3 losers, followed by a winner, followed by 3 more losers, followed by a winner, followed by 4 losers, etc …. You need the whole difference between the peak and the trough). Make sense?
  5. so far largest drawdown has been 164euro/ contract
    =0.64% unleveraged
  6. total margin requirement is not 2425E

  7. In which case, apologies for muddying the waters! I guess it's me that doesn't understand your numbers...
  8. Initial margin: 1347 euro
    Maintenance margin: 1078 euro
  9. Blotto


    The notional value of a single contract is around €27,000. Therefore to employ all of your capital (€100k) to this strategy you would trade a minimum of 3 contracts.

    The question becomes whether or not you wish to employ any leverage in your trading.

    The maximum number of contracts you can trade is 74 contracts. This would be a position size of approx €27,000*74 or roughly €2 million - which is a leverage of 20:1.

    20:1 is an aggressive leverage. Therefore you must choose any number of contracts between 3 and 74 - for either fully employed capital with no leverage, or 20:1 respectively.

    Since your strategy is close to coin flip odds, you should not be using heavy leverage. 100 points per month on the FESX is very good however. This means you can make great risk adjusted returns, however you will not use the leverage available to a trader with the same parameters but with a 75% strike rate.

    €1000 per contract per month would give you a return of 3% per month without using leverage. This is over 20% annualised and I'd recommend that you build a leverage free track record. If you can make 20% per year consistently, I have been told by experienced people in the industry that you should have a very good chance of attracting OPM to manage.

    Without knowing more about your strategy or the numbers, I'd run various figures through a spreadsheet using between 0 leverage and 4:1. Your comfort zone is probably somewhere in between.

    Edit: I forgot to add that €6/RT commission is a rip off. You should not be paying more than €1.50 to trade this market. Ring around a few FCMs and quote your account size and average volume per month - you'll do much better than €6.

    Not many brokers publish online their quotes, but a good reference point is Velocity Futures who do state their quotes. They start at €1.48 per contract per round trip before volume discounts. Saving €4.50 per RT on 5 lots traded twice daily will save you at least €7,000 per year - or in other words an additional 5% annualised profit.

    There are some good London prop shops also. Getting a self backed remote deal with them will cut your commissions to around €0.60 per RT.
  10. thank you blotto, i appreciate the time you took to think about this.
    i was planning on starting with 5 contracts and rev it up a bit once we have a cushion (profits)
    the commission question is not that simple, as it is used to pay for: analyst, office, colleague, licensing etc. But it's good to know that 0.6 per RT is out there.
    #10     Jul 5, 2011