Any formulas to calculate the optimum account size for trading futures in a time frame T given its maximum ever drawdown in that timeframe and its return distribution? I think that using (max DD + margin) for that is way risky non-optimal.
Here's one method I apply, definitely not the only one, and perhaps not the best either.
But just to let you start somewhere... others will jump in for sure.
My risk management strategy allows me to risk maximum 1% of my total capital per trade.
So the distance from my entry price to my stop price shall translate into 1% of total capital max.
You usually select the time frame you wish to trade, the larger the better of course and check the average true range of that time frame. Let's say you chose to trade the ES future contract on the 60min chart, and today its corresponding ATR(14) is around 5 points.
I personally let my stop distance be around 2x ATR, so 10 points in this example, which translates to 500$.
Back to my above max risk, 500$ shall be 1% of capital, in other words the minimum capital I shall hold to trade 1 ES contract in today's conditions is $50,000.
On the other hand, I also do a calculation on margin requirements, my broker requires $3,500 per contract for overnight maintenance margin, and if I trade 1 ES contract that will tie 7% of my total capital. That's acceptable by my standards, I usually allow margin to reach max 20% of total capital, never more.
Finally, a third consideration, is my historical maximum drawdown, mine is 6 in a row as of late... so I do calculate my worst case scenario of hitting the stop 6 times in a row, that would translate in our example above to a loss of $3,000 which represent 6% of the total capital calculated above.
I usually prefer to limit my max drawdown to 5% of capital, so in this case I will increase even more my min capital from 50,000 to 60,000
Now call me conservative, I am sure many will lose their mind if they are to trade only 1x ES for every $60k in their portfolio. But that's just me
Successful people will do what unsuccessful people won't or can't do!
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2. I am willing to accept x% chance of my account dropping below a predetermined point (my ruin point).
3. I am willing to accept y% chance of a certain maximum % drawdown.
4. I then run the simulation, and it gives me median percentage return, for a given starting equity.
My biggest piece of advice is that you should not try to be "too" optimum, using past data. If the distribution of past data varies from future data, and you've sized your account based on the past, you might find yourself being too aggressive and possibly blowing out your account. That can easily happen, even with a terrific winning strategy.
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