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Guys, all this % risk is a bit confusing for me. I want to trade ES and basically is there an easy way to calculate how many contracts to trade?
My broker has a margin requirement of $400 per contract. My Stop Loss will be 6 ticks.
My fund will be $5000 for live trading.
So 6 ticks will be $75 risk per contract?
That is 1.5% based on my starting fund.
Is this too high/low?
What I want to understand is how many thousands in my account will equate to hwo many contracts to trade.
i.e. $5000= 1 contract
$10,0000= 2 contracts etc.
Can you help answer these questions from other members on NexusFi?
Get a book by Brent Penfold called something like Trading the SPI. The SPI in the book is actually the Australian futures and he does a very good section on explaining how to calculate the number of contracts to trade and potential gotchas.
Neil.
IMO taking 1-2 percent of risk per trade is sort of common sense...but of course this depends on your personal preferences and risk appetite, which already has been discussed several times...
And perhaps you may check out this thread as well:
Just out of curiosity, how much of your capital are you guys allocating to each of your positions? I know that some guys have a higher skill level than others so they're willing to take on more risk.
"If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much." - Jim Rohn
I personally believe that the cash one deposits in futures trading accounts is not very relevant to the overall risk management strategies that you should subject your net worth to - except for leaving perhaps to the broker the minimum amount one would be comfortable to trade with and at the same time afford to lose in case broker goes bust.
I would rather start by analysing my strategy on a 1x contract position size; and calculate the average loss and average win per trade, the winning probability, the maximum drawdown, maximum consecutive losing trades, adverse/favourable excursions and so on; using extensive backtests, walk forward, monte carlo analysis, long periods of sim trading, etc...
Let's say I have found that the below parameters apply to my strategy (this is just an example):
1. average loss per trade $75
2. average gain per trade $225
3. winning probability each time I attempt a trade 40%
4. maximum consecutive losses 7 trades in a row
5. maximum drawdown $900
Then I would perhaps decide that I need to have in my account the legal $500 required by my broker to trade 1x ES and on top of that for safety reasons assume a buffer of 5x my max drawdown => 5x $900 for a total of $5,000 required in my futures trading account for 1x ES.
As soon as you determine your requirement, you shall transfer to your trading account that minimum cash value, in the above example $5k and start running your strategy.
As time goes, and if your live trading replicates your sim performances you should of course be building profit in the account, and only then you would think of increasing position size.
I would apply the same logic above to increase my position size, using the live trading performance parameters that might or most probably will be different than the assumed set of KPIs derived during your sim phase.
Let's say, after few months of trading live you come up with the following set of performance indicators:
1. average loss per trade $65
2. average win per trade $160
3. winning probability 45%
4. max consecutive losers 8
5. max drawdown $720
You would then start again your calculations as before: $1,000 for the legal minimum to trade 2x ES plus 5x max drawdown per contract => $7,200 for a total of $8,200 required account size.
You might maybe think by that time that 5x is very conservative, you are executing perfectly your strategy with no errors, and maybe 4x max drawdown would be more than enough: in this case you would start trading 2x ES as soon as you reach $6,760 or vice versa you could perhaps decide to increase buffer to 6x max drawdown, and so on.
This is all very theoretical of course, and just to give you an idea or a place to start - definitely not the only method.
As mentioned before, you can find extensive material on the net, in books, and forums regarding this subject.
Back to reality : practically, I have found with own experience and through watching others, that good conservative traders would be trading 1x ES for more or less each 10,000$ or so in their account to allow for proper trade management, volatility, slippage, etc... It is up to you to decide, you alone know your strategy and your financial situation/risk tolerance.
It is worth noting, that if your total net worth is $20k then it wouldn't be very wise to transfer $5k to your trading account to start a strategy on the ES. In this perspective, I always recommend a max of 10% of total net worth dedicated to speculation, but again that's just me.
Either case, good luck with your endeavour; and do not hesitate to revert back shall you think I could be of any further help.
Cheers
Fadi
Successful people will do what unsuccessful people won't or can't do!
I definitely agree with this range, do not allow your average loss per trade to go above 1% or 2% of your total net worth, or it will be extremely difficult to recuperate your losses and break even afterwards.
Successful people will do what unsuccessful people won't or can't do!
you might want to gather some statistics about the average rotation in ticks of the ES. This will yield some insights regarding the stop size and you might find that 6 ticks are too small so otherwise profitable trades just get stopped out by noise. The conclusion then might be that the stop has to be wider, but in order to keep the risk low the account size would have to be higher.
A good practice that I see in use at hedge funds that allow margin trading in the first place; is to never let margin requirement exceed 15% to 20% of total capital.
In other words, if the CME maintenance margin requirement overnight on ES is $3,500 …
I totally agree...and relating to your previous post, again an excellent analysis on how to calculate and set risk parameters, as always.
"If you don't design your own life plan, chances are you'll fall into someone else's plan. And guess what they have planned for you? Not much." - Jim Rohn
I did this simulator to calculate your position size for different account size and stop loss. You can edit the risk % and tick value for other instruments.
