I probably already have your risk of dying, although from the heart, not the lungs. Heart disease runs in my family. My Dad had a double bypass in 1973, a quadruple bypass in 1983 and a triple bypass in the late '90s. He actually had a bypass of a bypass of a bypass.

The irony is he died with a relatively strong circulatory system. Cancer got him instead.

Stay Well!!

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I was talking to a friend a few weeks ago; someone who has a net worth above 10*Z and is about 70 years old.

He asked if I was eating well - I said I still cook, it's about $25/day but not too shabby. Hearing this, he said hey just let me know, we can go to O Ya (probably the most expensive restaurant in Boston - for contrast, we were having this discussion at the Bristol Lounge in Four Seasons and that's considered shabby) whenever I'm around.

Out of modesty, I quickly said no - but I regret it now - not because I missed on a chance to get a constant supply of $500 food, but rather because I realized his position: When you have a net worth of 10*Z, are about 70 years old, and still live on your own in a suite at the Four Seasons, an entire continent apart from your family, you'd pay anything to get genuine company for a night.

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For the most part I like to keep my math simple so that I can understand it. Monte Carlo analysis is too far over my head for me to really understand it. I see any formula with more than one set of brackets and my eyes glaze over. Mention standard deviation, degrees of freedom or square root and I cover my ears and scream la la la.

So take it easy on a math challenged faulty conclusion maker.

How long do you plan to spend in front of a computer each day? Are the systems automated with defined exits set on entry?

Kevin Thanks for taking the time to answer.

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Spending time with a high net worth person, especially if he is a teacher, and if he is low on arrogance, sounds like a winning proposition - even if you go to McDonalds...

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No problem, I will try to keep the math simple. My Monte Carlo Excel spreadsheet requires no math skills, if you decide to use it...

According to my family, I spend most of my time in front of a computer anyhow, so adding the NGEC system to the mix is no big deal. In a later post, I will detail exactly how I am trading it (manual vs automated, attended vs unattended, VPS vs no VPS, etc). But I can tell you it is no real extra work.

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If you have a good trading system, eventually you will want to start trading it with multiple contracts. There are a ton of position sizing schemes out there (Van Tharp wrote a huge book on the topic), so there is no right way to do it. There is no Holy Grail position sizing technique, though, where you get more reward for no extra risk. The simple way to put it is this way: if you trade more contracts, your reward goes up, but so does your risk.

So, here is what I am doing (at least for a while, hopefully once my size gets big I'll become less aggressive)...

As always, I start out with only 1 contract. Why? Going live almost always reveals issues that backtests, sim tests and incubation tests keep hidden. For example, if my strategy is automated, what if some quirk in my code sends multiple orders, or otherwise goofs up? Or, what if my slippage estimates are way off, and real world slippage actually makes my strategy unprofitable? My experience is that starting with 1 contract is the cheapest way to find out and correct any live trading issues.

A second reason I like starting with 1 contract is that I want to remain emotionally detached as much as possible from the strategy performance. 1 contract profit and loss swings won't impact me or my emotions. 10 contracts, right off the bat, would freak me out a bit - I'd be watching the system too much, and have too emotion invested in it. As profits (hopefully) accumulate, I can add contracts at a comfortable level, and not be emotionally disturbed by it. If things go really well, in 6 months or even a year or two, trading 10 contracts at a time with this proven system will seem natural to me.

Some people would say "if you have an edge, exploit it fast and furiously" by trading max size right off the bat. Edges disappear, so take advantage while it exists. That is a good argument, and I understand the concept. But, I also know how I best operate, and going "all in" at the start is not good psychologically for me.

A final reason I like starting with 1 contract is that I like the strategy to be self generating - profits will build the account, leading to more contracts, building it further, leading to even more contracts, etc. No profits mean no increase in size. That just makes sense to me - why allocate more money to a system that isn't generating profits?

One drawback to this approach is that it can take a long time to add that second contract. For example, if you decide to trade 1 contract for each $10K in your account, you will have to have 100% return to add 1 contract. Then you'll need another 50% gain to add a third contract. That can take a long time.

Some position sizing techniques take this into account (fixed ratio sizing comes to mind), but these approaches have some negative characteristics I do not like.

I get around this dilemma by sizing my account for roughly 1.5-2 contracts at the start. This would be equivalent to starting with $15K, in the example I gave just above. Then, I only need 50% gain to add a second contract. This still forces the system to perform well, but at the same time I get contract growth sooner. For me, it is a great tradeoff.

With all that in mind, here are the details:

For my NGEC system, I have decided to use fixed fractional sizing.

Ncontracts = X * Equity / BigLoss

where

Ncontracts = integer number of contracts, always round numbers down

X = fixed fraction, which I determined through Monte Carlo analysis. For this system, I am using 0.175 (I'll explain later how I got this value)

Equity = current equity value

BigLoss = Largest daily loss, $885 for my NGEC system

Using the above, I can create the following tables:

Note that my fixed fraction of 0.175 might seem awfully high. It may be for most people. I determine it based on risk of ruin, annual return and max drawdown. I use my Monte Carlo spreadsheet to calculate all that. That will be in Part 2 of "Position Sizing."

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In the last post on Position Sizing, I determined that using fixed fractional sizing with X=ff=.175 was my best alternative. Please realize that this is my personal preference, based on my personal goals and objectives, and that amount probably would not be right for you.

The question is, how did I arrive at this figure? Why not just trade 1 contract all the time, or use a fixed fractional value of .01 or .02 or .10 or .50? This post will address that.

To determine the position sizing scheme that is right for me, I use my handy dandy Monte Carlo simulator, the basic (1 contract) version of which you can download for free at the bottom of this post. For a given trading system, it will estimate the probabilities of risk of ruin, median max drawdown, median annual return for the first year of trading.

The baseline version of this calculator assumes 1 contract traded throughout the year, but the macro code can be edited to simulate different position sizing techniques, which is what I am doing here.

There are 4 performance numbers I look at:

Risk of Ruin - how likely am I to hit my defined lower cash balance. I want this number low.

Median Maximum Drawdown - I have roughly a 50% chance of hitting this maximum drawdown sometime during the year. That of course means my maximum drawdown could be much greater than this value, and it could be less. I want it as low as possible, with a personal upper limit I have determined from doing this exercise a bunch of times.

Annual Return - As with drawdown, I have a 50% chance of reaching this annual return, and it could be much higher or much lower. I want it as high as possible, but I have no lower limit threshold acceptable value (the only number I don't have criteria for).

Return/Drawdown Ratio - Astute readers will recognize this as the Calmar ratio, although true Calmar is calculated over 3 years, not just 1 year. I want this value as high as possible, and I have a lower limit for acceptability. (Just for reference, for professional CTAs a Calmar above 1 is considered pretty good. That means if you want 25% annual return, you have to be willing to accept a 25% drawdown).

Using that criteria, I can try a few different position sizing approaches, with some different parameter values. Note that this is not all encompassing - I have not analyzed many other potential position sizing schemes. Maybe one would work better than what I chose.

Before I reveal the results, I should mention that I played around with the starting balance a bit, although I am not showing those interim results. Basically, by adjusting the initial account size, I was striking a balance between having too much money in the account, being able to add on a second contract relatively quickly (without doubling my account size first) and keeping risk of ruin low. I eventually settled on $8500 as the start balance, a good trade off between all competing metrics.

Here are the results, with the one I chose highlighted ("ff" is the fixed fractional amount):

My selection meets all my criteria, and I am comfortable with it.

This position scheme is the right one for me, right now. BUT, depending on how things go, I might change it down the road, either to a different scheme altogether, or a smaller value of f (ie, I will become less aggressive as the account grows). I'll let the performance of the system dictate if and when that happens.

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Strategy #1 - 105 minute bars - runs from 6 PM ET to 7 AM ET

Strategy #2 - 60 minute bars - runs from 7 AM ET to 2 PM ET

So, each is independent, and does not know what the other one is doing. Each strategy operates in its own little time period, so there should never be an overlap in positions.

So, yes, they are being traded as separate systems, but within the same account. I do this because Strategy #1, while not providing a lot of profit (strat #2 is much better), takes advantage of strat #1 downtime and uses margin that would otherwise be stuck just in cash.

Also, I could apply separate position sizing schemes to both strategies, but in the interest of keeping things simple, I am just going with the same position size in both strategies. Probably not the optimum approach.

Hopefully that explains it better. If not, just let me know what is confusing, and I will try again.

Thanks!

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