I've seen the ES drop several points in a matter of seconds. At $500 per contract, more than half of that could be gone just like that. And stops might not matter, as one could filled right at the bottom. I cannot fathom any reasonable trader supporting one ES contract with anything less than 10K (I would personally go much higher). I am not worried about what I can control, but with what I can't: What if the brokerage you were trading with had an outage, and you could not trade for minutes, even hours? What if Globex went down? The stocks supporting the index would still trade--the index itself might not (at least on the platform you're used to). In the time it could take you to telephone your broker to get you out with floor-traded products, your account could be in freefall. What if the power went out in your neighborhood? Minutes, even hours, with no electricity (and, darn it, the laptop battery needs recharging!). What if the cable company is employing some putz who just cut off the entire neighborhood from cable internet access. For twenty-four hours. All of these things have happened, to me or to others I know.
I would trade 833 at a time with global's $300 day trading margins. I have traded 40 ES with a sub 25k account but my type of trading includes taking a 20% drawdown on 1 out of every 5 trades. What if ? You can always hedge using pit trade contracts. You can always hedge with the back up account that you keep for these reasons. For power failures I use this http://www.bestbuy.com/site/olspage...t&productCategoryId=cat08029&id=1099395555243 If the cable goes down, I have this http://www22.verizon.com/ForHomeDSL/channels/dsl/packages/default.asp If the desktop breaks, the laptop is running right next to it. "prepare for the worst, hope for the best"
I truly SUCK at adding to winners but I know what rarely works! My impetus is to add to longs on strength. It's a no-no. The best move is adding to a winner when the market is retracing or rotating lower off a swing high. It's a VERY hard trade to make. Why? Because at the best time to add, i.e. a swing low, our existing long is also at a "low point". Example. Lets say @ 1250.25 you get long ES off S1 support and it holds. The high has been 1253.50. So to be proven right you wait for a new high. Now it trades up to 1254.00 and you believe the trend has been defined to the upside. Often I pay 54 for the add. Trouble is, a moment later ES is 53 sellers and my average is now a bit higher than 52. I'm now trying to think more logically, "ok I'm long, the action is higher, where can I define the new bottom by pricing support on a reaction." Obviously in run away rallies like this morning or on some of the trend days lower over the past month that's been a poor strat but by and large an add should be put on a judiciously as was the original. There's part of all of us that think's "hey I got a winner on! I can add wherever I'd like!" Those emotions create swing highs.
There is a numerical way to guage how much equity should be reserved per contract. If you backtest your strategy (assuming you're taking a more mechanical approach), you will see a sequence of trades that produce a pattern of wins and losses. It is widely published that one should take the worst drawdown in the backtest to determine the % risk to use. This is an entirely false conclusion. The truth is, one doesn't know what sequence of wins and losses to expect in the future, even if the expectancy, profit factor, etc. etc. remains steady and constant. If the backtest shows a maximum of 8 losing trades in a row, producing $X of max. drawdown, one is not guaranteed that future trading of the method will limit any future drawdown to $X. One must employ monte carlo simulation to obtain the true worst-case drawdown. Each run in the simulation can produce a varying backtest result by using any one of several methods. It might be by scrambling the original trade sequence randomly, creating synthetic price streams, or modulating the given price action; it doesn't matter. What DOES matter is statistically characterizing one's potential drawdown so that the limit of what is truely likely to occur can be obtained. $10,000 per contract doesn't mean anything unless applied to a specific strategy and statistically observing the worst possible outcome of the method. RoughTrader
Yes Smiley I agree, what you say is all true. As per Volente, I have two DOMS running side by side one for each broker, two computers each running the same software with one cable and one DSL hookup, two data feeds (actually 3 if you count Pats), brokers trading desks on speed dial and a partridge in a pear tree. Now, if all the bids get pulled and my stops not filled and I get stuck, and my hedge takes a little bit too long to put on... well what can I say. We all take that chance as soon as we enter a trade. It'll just cost some more than others.
I'm much more aggressive and confident in my style: $2500 margin per contract. Thus $250,000 equity is 100 contracts. As for Globex going down. It did once that I know of. April 26, 2005 @ 9:52 a.m. C.S.T. and did not resume until 12:45 p.m. for a total meltdown of 3 hours. If you were long, you're SOL. But if you're short, stay put. They'll be (and was) a mad dash to the exit once Globex resumed trading. A mini crash if you will. The market opened 8 ES points down from where it left off. Remember, markets crash down, not up. And the market continued to trend lower and close down for the day. Globex crashing is not the trajedy one thinks-- if one is short the market, it is a Godsend!
Wow, a nice little thread here on ET, who would have thought? Thanks for the comments guys, keep them coming.
this is why one should only have as much as they can afford to lose in the ES trading account---profits swept out every day. high margins will just cause you to lose more in a disaster type scenerio. surfer