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Drawdown and Leverage/Position Sizing Question


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Drawdown and Leverage/Position Sizing Question

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  #1 (permalink)
 aotc 
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Im curious to hear some opinions on how to manage trade size/leverage given max DD.

So Hypothetically I have a strategy that has had a max drawdown of 10k over a 10 year period. You never know what the future holds, but a reasonable expectation is to have a maxdd of 10k. If it is substantially different then it would be a red flag.

If I would start with a 50k account, then the max DD would be 20% if it would occur right off the bat. However chances are that the strategy would make money before reaching the max DD. then the max DD would be less than 20% if it ever occured in the future.

At what point would you lever up and put on another contract? One option is to wait until there is 50k in profit and then put on a 2nd one, then the max dd at that point would be potentially 20% of the new account value.

Another aggressive option would be to put on another contract once the profit on the first one reaches the max DD. Then to trade that 2nd one until perhaps the losses hit the max dd level, then to potentially reduce to one contract.

Im sure there are options in between, or even more conservative. How would you all handle this?

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 forgiven 
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aotc View Post
Im curious to hear some opinions on how to manage trade size/leverage given max DD.

So Hypothetically I have a strategy that has had a max drawdown of 10k over a 10 year period. You never know what the future holds, but a reasonable expectation is to have a maxdd of 10k. If it is substantially different then it would be a red flag.

If I would start with a 50k account, then the max DD would be 20% if it would occur right off the bat. However chances are that the strategy would make money before reaching the max DD. then the max DD would be less than 20% if it ever occured in the future.

At what point would you lever up and put on another contract? One option is to wait until there is 50k in profit and then put on a 2nd one, then the max dd at that point would be potentially 20% of the new account value.

Another aggressive option would be to put on another contract once the profit on the first one reaches the max DD. Then to trade that 2nd one until perhaps the losses hit the max dd level, then to potentially reduce to one contract.

Im sure there are options in between, or even more conservative. How would you all handle this?

the questions you referenced depends on how long you have been trading, how long you have been profitable , has your method stood up to changing market conditions, how deep are your draw downs , and how good you are at fixing a problem with your trading when you have one . a rule of thumb i started with is to risk no more than one half of one present on any trade. after doubling my account i could move to one present . but that is the max . to stop draw downs i put a 20 day moving average on the equity curve . when it drops below the average i go to sim until it pops back above the average . hope it helps

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 Tymbeline 
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There are precise, mathematical ways of answering accurately all your questions above, so that you can calculate, for example, within 95% certainty (or 99% certainty, or whatever you want to know) the risk parameters of having an unacceptable drawdown, and select your position-sizing accordingly.

A good starting-point would be Michael Harris's book: Probability & Systematic Trading.

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 aotc 
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forgiven View Post
the questions you referenced depends on how long you have been trading, how long you have been profitable , has your method stood up to changing market conditions, how deep are your draw downs , and how good you are at fixing a problem with your trading when you have one . a rule of thumb i started with is to risk no more than one half of one present on any trade. after doubling my account i could move to one present . but that is the max . to stop draw downs i put a 20 day moving average on the equity curve . when it drops below the average i go to sim until it pops back above the average . hope it helps

I like your idea of the 20 day ema regarding the equity curve. It is good to have multiple signals indicating that something might be off. My other thought is that if the account would reach the historical MaxDD I would either reduce size or stop, wait, and observe.

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 aotc 
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Tymbeline View Post
There are precise, mathematical ways of answering accurately all your questions above, so that you can calculate, for example, within 95% certainty (or 99% certainty, or whatever you want to know) the risk parameters of having an unacceptable drawdown, and select your position-sizing accordingly.

A good starting-point would be Michael Harris's book: Probability & Systematic Trading.

Thank you, I will take a look at that book. Do you have any other book suggestions?

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 Tymbeline 
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aotc View Post
Do you have any other book suggestions?


Trade Your Way to Financial Freedom by Van Tharp (and especially the second half of the book) will also help you, specifically on position-sizing, I think.

And when you have a few hours with nothing else to do, this thread is certainly worth a read:


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 aotc 
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Tymbeline View Post
Trade Your Way to Financial Freedom by Van Tharp (and especially the second half of the book) will also help you, specifically on position-sizing, I think.

And when you have a few hours with nothing else to do, this thread is certainly worth a read:


Thank you! I will check these out. I started the harris book and it was a good suggestion!

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 Sandpaddict 
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aotc View Post
Im curious to hear some opinions on how to manage trade size/leverage given max DD.

So Hypothetically I have a strategy that has had a max drawdown of 10k over a 10 year period. You never know what the future holds, but a reasonable expectation is to have a maxdd of 10k. If it is substantially different then it would be a red flag.

If I would start with a 50k account, then the max DD would be 20% if it would occur right off the bat. However chances are that the strategy would make money before reaching the max DD. then the max DD would be less than 20% if it ever occured in the future.

At what point would you lever up and put on another contract? One option is to wait until there is 50k in profit and then put on a 2nd one, then the max dd at that point would be potentially 20% of the new account value.

Another aggressive option would be to put on another contract once the profit on the first one reaches the max DD. Then to trade that 2nd one until perhaps the losses hit the max dd level, then to potentially reduce to one contract.

Im sure there are options in between, or even more conservative. How would you all handle this?

Well given those numbers and your conviction level... the right time to add contracts is at the low of the %20 drawdown.

So technically your "buying low" in your equity curve.

If instead you were to add at your equity peak it means your next drawdown could be even larger even though it's the same percentage because of the larger position size.

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