need position size math help

Discussion in 'Strategy Development' started by profitseer, Sep 25, 2002.

  1. This is a math question not a trading question

    A trader has $20,000. He wants to trade a system the often has a 50% drawdown. The min margin is 2000. he wants to be able to stay solvent through the 50% drawdown. What's better?

    Start out at full margin trading 10 contracts and reduce size as drawdown progresses


    Start with 5 contracts and maintain constant position size

    Thank you, I'm not sure how to do the math
  2. The traders real problem is he likes to risk 2% on every trade, but the systems stops are so tight, that if he starts with only 5 contracts, that will only be about 1.25% risk per trade. So that is why he is asking the math question.
  3. BKuerbs


    Do you have a list of trades on a one-contract bases for your trading system (lots of trades)? Then you could program a Monte Carlo simulation for both approaches.

    I think you need at least some more numbers like %winning, average loser, average winner (per contract).

    A MC simulation would be preferable, even if the list of trades is based on a backtest.


    Bernd Kuerbs
  4. If you only have $20,000 and minimum margin is $2000 and you are trading 10 contracts then you are betting it all every time. You will either be wiped out or extremely lucky. You could lose your entire stake in 10 minutes.
  5. ok let's say average loss per contract per trade $42.3
    Average profit per trade $45.2
    including slippage and commisions and system failures and mental errors and a few minor catastrophic errors.

    Hit rate about 50%

    All I really want to know is how to do the math, the primary objective is to risk 2% of equity on every trade and still survive a 50% drawdown. Preferably without reducing position size. So far I can figure out that that is not possible with 10 contracts or 5 contracts.
  6. neither.......

    if a system often has a 50% drawdown..........than after enough runs it could easily have a 90% drawdown.

    I'd question your edge..... first

    2nd I'd trade a lot less contracts. If you are in a 50% drawdown you'll need to do 100% returns to get back to even.

    As the drawdown increases the returns to get back to even maginfy heavily. A 90% drawdown takes over 900% to get back to even....

    How many systems do you know that make 900%?


  7. Ok. You've got your wording off.

    Drawdown is your % of equity you lose. Not the % you are correct in a system.

    Info--- I need to know is what is your stop with each trade?

    You can risk 2% per trade. ie $400 It's considered aggressive and you might have some serious drawdowns given enough time though.

    Your risk is your entry price minus your stop * the # of shares/contracts you buy per trade.

  8. I make a very nice living accepting huge amounts of risk. I am always on the verge of disaster. My worst drawdown was 35%. I never want to go through that again. But I want to be able to survive a 50% drawdown. If I lose 50% it will take 100% move to get even, IF, I maintain constant position size.

    But IF I maintain constant position size, I will no longer be able to risk 2% on every trade because losses now are too small.

    So what I want to know is, how do I determine the best position size to at least get as close to 2% per trade as I can? And is it worth increasing size if I have to to get back up to 2% if I have to then reduce size in a drawdown?

    I am really quite comfortable as a trader, it is as a mathmatician that I need help.
  9. ok, let me try this. If margin is 2000 and I allocate 4000 percontract, I can survive a 50% drawdown. But if I allocate 4000 per contract, that puts my average loss to less than 2%. I want my average loss to be 2%. How do I compute the best strategy to decide whether it is better to just accept the lower risk or increase risk by increasing position?
  10. Profitseer,

    You have me very confused :confused:

    If you want to start sizing your positions -- first figure out what type of drawdown your method yields in the form of points not %'s.

    Then take a step back and come up with a max-drawdown % to your overall equity that you are willing to take(15%, 25%, 35%).
    #10     Sep 25, 2002