Welcome to NexusFi: the best trading community on the planet, with over 150,000 members Sign Up Now for Free
Genuine reviews from real traders, not fake reviews from stealth vendors
Quality education from leading professional traders
We are a friendly, helpful, and positive community
We do not tolerate rude behavior, trolling, or vendors advertising in posts
We are here to help, just let us know what you need
You'll need to register in order to view the content of the threads and start contributing to our community. It's free for basic access, or support us by becoming an Elite Member -- see if you qualify for a discount below.
-- Big Mike, Site Administrator
(If you already have an account, login at the top of the page)
Strategy portfolio Drawdwon in relation of single systems DD
I have a question about how do you calculate the necessary capital to run more strategies at once.
(Just to specify: I'm still developing and testing my first automated strategies and I'm planning to go live this autumn/maybeWinterLetsSee with 2/3 running strategies FOR THE FIRST TIME EVER).
Usually a common way to calculate the capital required to run a strategy is the sum the future required margin (intrada in my case, I'm not planning to go overnight) and the maximum strategy DD in the backtest.
Now suppose I would like to run 3 strategies and make the above calculation for each strategy and sum the 3 results obtaining X value to run the 3 strategies at the same time.
The X value in this case is obtained by doing separate strategies calculations.
Then suppose to run a portfolio strategies backtest (I still have to try it, at the moment I have only one confirmed strategies working properly and I'm still developing the other 2), it would be possible that the capital required Y (let's call it Y) is smalled than X due to the combined strategy systems results.
My question for the experts is : Is that possible, can it happen ? I mean would it be correct to use Y as the capital necessary to run multiple strategies instead of X?
If the answer is yes... then using a limited capital could cut some operations due to insufficiend liquidity when a system is trying to opena a trade and another systems has an open trade running?
Can you please share your experience/thoughts?
Thanks :-D
Can you help answer these questions from other members on NexusFi?
Congrats on running multiple strategies. Diversification can be a really good thing. You have already identified the 2 extremes:
Minimum Capital: Enough margin to take a trade in each strategy at the same time, without being denied for insufficient buying power
Maximum Capital: Treat each strategy independently, and give each its own virtual "account" capital. Assume no diversification benefits.
So, first I'd calculate these two values, so you know the min and max. Then, you know you want more than the min (to prevent margin calls) and you'll likely want less than the max (to take advantage of diversification).
What I do, and what I teach, is that you have to look at the combined results of your strategies, and see the amount of correlation and drawdown with your strategies. Since you are running intraday systems, you'd probably want to do this with daily results - combine all your strategies together, and see how they balance each other out. That will give you an idea of how much excess capital you need each day to avoid margin calls.
My advice: start out with the maximum capital (assume all strategies are independent), then as you get comfortable trading all of them, you can make adjustments based on the amount of free capital you see, the risk you want to take, etc. Having uncorrelated strategies make a big difference in this regard.
thank you very much for your complete answer. That's something I was suspecting to be the right way but, as I said, I was interested in some comment from experienced systematic trades and you were really exhaustive.