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A case for trading a combination of CL and QM

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A case for trading a combination of CL and QM

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  #1 (permalink)
Austin, TX
Experience: Advanced
Platform: TradeStation
Trading: Futures
Posts: 882 since Mar 2011
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Qualifications and Assumptions:

Assuming you have a profitable strategy observed over some time period.

Assume that strategy has a maximum observed drawdown that's reasonable (equal to or less than the marginal reserve value for one contract).

Assume the strategy is not a scalping strategy and goes after mid-large size moves that are fairly resistant to slippage considerations (100-500 tick moves on CL).

Assume that you're employing a money management system that holds drawdown reserve until you double your initial investment (initial investment = marginal reserve + drawdown reserve and any extra).

So, if you had say....$20k account. Let's say you observed a profit of $25k over 6 months (trading 1 contract) with a maximum drawdown of $5750.

If you followed the management plan above.....

You would scale according to this schedule:
1-12k profit (1 contract) for a profit of 12k (32k account balance).
12-18k profit (2 contracts) for a profit of 12k (44k account balance).
Now you can forgoe the drawdown reserve and amplify/maximize the runups/drawdowns and total return. You will hold this as a sacred reserve.

18-20k (3 contracts) for a profit of 6k (50k account balance)
20-22k (4 contracts) for a profit of 8k (58k account balance)
22-24k (5 contracts) for a profit of 10k (68k account balance)
24-25k (6 contracts) for a profit of 6k (72k account balance).

Now, let's compare with QM (E-Mini).

You observe slightly less profit at half the rate of CL. ($12k profit).
Your drawdown correlates almost perfectly. so with drawdown reserve, you're trading $6k/mini contract.
You begin with the same starting capital of $20k.

That means you can start with trading 3 minis (already you can see that more of your capital is at work for you...$18k of the minis starting out and only $12k of the CL starting out).

so it follows this schedule...

1-2k (3 contracts) for a profit of 6k (26k account balance).
2-3k (4 contracts) for a profit of 8k (32k account balance).
3-4k (5 contracts) for a profit of 10k (42k account balance).
Again, from here on, you maintain the $40k sacred minimum and you operate with no drawdown reserve for future position increases. This will mean you'll have to scale out somewhat in drawdowns, but you'll also have larger run ups.

4-5k(7 contracts) for a profit of 7k (49k account balance).
5-6k(9 contracts) for a profit of 9k (58k account balance).
6-7k(12 contracts) for a profit of 12k (70k account balance).
7-8k(16 contracts) for a profit of 16k (86k account balance).
8-9k(21 contracts) for a profit of 21k (107k account balance).
9-10k(28 contracts) for a profit of 28k (135k account balance).
10-11k(37 contracts) for a profit of 37k (172k account balance).
11-12k(49 contracts) for a profit of 49k (211k account balance).

Now, in fairness, there are some assumptions that must be addressed. 1) The strategy has a high netprofit/trade value. Strategies that have a large trading volume will be significantly effected by increased commissions of the mini. 2) Volume saturation. I'm not very familiar with acceptible trading volumes for the mini, so you might "saturate" and reach an unfavorable level as your positionsizes grow with the minis. What that level is...I dunno.

But as you can see, the effect is pronounced. By essentially increasing the rate at which you're able to compound your earnings, you increase your overall bottom line significantly.

This has always been one of the drawbacks of futures contracts....they're discrete in nature and you can only increase position sizes in large increment levels (as opposed to equities which are more continuous/fluid....the size of even the largest shares are small compared to a future contract margin requirement).

The ability to quickly "rollover" your money has a profound effect. Thus, if you're starting or operating with a smaller account, trading minis, at least for the first few profit cycles, might be a more profitable approach.

I would suspect that some additional work needs doing to optimize using a combination of trading minis at first, then transitioning to the larger "full" CL contracts and maybe even leveraging the scraps of your account (the remainder of what's leftover after you trade your CL margin reserve+drawdown reserve).

As I said...if you have $20k, and your drawdown is about 100% of the value of the CL contract, then with a $20k account you can only "safely" trade 1 contract. But with mini's you can put more of that leftover/remainder to work for you (instead of sitting on the sidelines in reserve).

"A dumb man never learns. A smart man learns from his own failure and success. But a wise man learns from the failure and success of others."
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July 15, 2011

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