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So when your looking to trade an account with say a 1% max loss on account value on say a $50K account, your max daily loss is $500.
If for example your trading a portfolio of 4 contracts over different strategies, the average portfolio loss is $400. Individually, some strategies employ a max stop loss of $1300 that rarely gets hit, but sometimes does.
When your trying to decide capital allocation, should you look at the average portfolio loss or the max potential loss of any single system?
I'm struggling with the single system approach, because the diversity of the portfolio losses smooths the equity curve.
From what point of view would you approach this? Each system trades only one contract.
Can you help answer these questions from other members on NexusFi?
It would really depend on how likely the strategies are to be correlated. If they're at all similar, I would treat them as one strategy for the purposes of a daily loss limit.
As for me, firstly I would test any sistem at demo and only after stick to one strategy. And at real accout use this strategy without thinking how to determain wrking lot.
You are trying to force you will on the market and are consequently getting beaten up. The market is a lot tougher than you, me and pretty well anyone else out there. You need to understand the idiosyncracies of the market/markets you are trading and build your risk management strategies around them. This might mean much wider stops and therefore less position size to allow for the amount you want to risk, you might decide that the optimum position size means that you have to risk more per trade. By not having your stops continually hit you could find that your profitability increases expotentially, you won't know until you start to think outside the square and address these sorts of issues.
Cheers John
I think you need to consider if that 1% is total daily loss, per system loss per trade, or if it is an average daily risk that as you mentioned can be exceeded.
As I see it now. if you lower your position sizes to make your max loss per day to 1% total you are going to need more capital. So it probably not viable. What you may consider doing is using volatility adjustment and allocate daily risk budgets per instrument. Or consider that you are really risking more than 1% per day. Especially given that in severe crises correlation begins to approach 1.
