|
|
|
|
|
|
|
proper risk control parameters, you should normally risk no more than $3000 (3 percent of equity). If the methodology that you are using has average drawdowns of $2000, then you will be limited to trading only one contract in either bonds or Swiss francs. However, if the bonds and Swiss francs are currently trading in an unrelated mannerthat is, they are not positively or negatively correlated to each otherthen you can trade one contract in each. The only way you could be risking 4 percent ($4000) is if both markets simultaneously lost $2000 on the same day, which is unlikely, since the markets are not currently correlated. The more uncorrelated the markets are, the better the diversification. |
|
|
|
|
|
|
|
|
Allocation by Number of Contracts |
|
|
|
|
|
|
|
|
In order to determine the number of contracts to trade, you must determine the maximum drawdown using your trading methodology. Remember that the number of contracts you should trade must be determined by the amount of risk incurred on that particular trade. All too often novice traders will determine the number of contracts they want to trade on the basis of their profit objective or available equity. This is a great way to experience a total loss of equity. |
|
|
|
|
|
|
|
|
Most novice traders fail to determine what the actual risk may be. This is because the market at any time may do something that is totally unexpected and unanticipated. The trader is usually best advised to consider what the absolute worst-case scenario is, and trade by risking too little rather than risking too much. Preservation of capital should be of utmost concern to all traders. |
|
|
|
|
|
|
|
|
Determining the number of contracts to place within any one particular trade is often difficult. It is so important because it is a key factor in decreasing or increasing the trader's equity curve. Traders must increase the number of contracts traded in order to properly utilize their equity. However, if the number of contracts traded is increased at the wrong time, it will lead to a severe drawdown. Some traders (usually novices) think it's best to increase position size after a series of losses. This is because they believe that a winning run/streak is about to materialize. There are times that the strategy will work, with the winning streak materializing, and the previous drawdown being quickly eliminated. However, it is just as likely that your drawdown could accelerate with the next trade. Consequently increasing position size after drawdowns is generally a poor idea. |
|
|
|
|
|
|
|
|
Invariably other traders will think that the best strategy for increasing position size is after a series of wins. It doesn't take much genius to realize the tremendous profit potential of increasing position size while experiencing a winning streak. With further contemplation it also becomes obvious |
|
|
|
|
|