Question about percentage money management across multiple markets

March 10th, 2021, 11:52 AM

I have been trying to backtest a trend following methodology applied to 24 different markets.

And one thing I am don't understand is on how to write the percentage risk management across multiple markets.

I know how to do it for one market. If I risk 1% per trade and my account balance is $10000, that is $100 per trade. If a trade has $50 risk then I trade 2 contracts and in case it is $100 then I trade 1 contract.

But I don't understand how it translates to multiple markets. At any given point I might have say 5 positions open, assuming that margin requirement for each position is 500 then the balance is remaining balance is 7.5k. In that case do I use 7.5k to calculate my risk or do I use the complete portfolio value? I have tried using the portfolio value and it works fine for the most part. But once I start getting cases where 21 markets show sign of trending then I run out of cash. Or even in scenarios where I had losses which reduces my account balance to say say $8k then even lesser number of signals exceed the cash at hand.

March 16th, 2021, 09:32 AM

It appears that you have already found the fault in your initial system: it didn't account for losses. Also, I think the main limiting factor is that you have a single account, so no matter how you slice it, all the risk is still occurring against that single account. Thus, you can just make sure that the tradeSignals align with the accountSignal prior to entering the deal (i have some pseudocode below, that might help).

I assume that you're trying to have the maximum amount of capital in the market at a time?

I would suggest being more conservative, and assume that until a trade closed, you would have to assume that each and every deal was a potential loser based on the stop loss and slippage encountered for an instrument.

Make sure that you consider these factors:
1. capital to purchase the contract
2. capital for intraday/overnight margin requirements
3. capital at risk (stop loss)
4. slippage (can vary per instrument)
5. correlation (though you mention 24 markets, keep in mind that entanglement is still possible, because some things like fossil fuel costs, international shipping, computer chips, or politics can have worldwide impacts)

So, maybe you have to consider not your current balance at the time you enter the trade, but your balance if you potentially lost the trade as well as whether or not you could meet margin.

thus, maybe this pseudocode is the direction you want to go:

tradeSignal = (your arbitrary trade entry rules)
accountCondition = (account_balance - (stopLoss + slippage + margin))
accountSignal = accountCondition > accountMinimum

enterTrade = tradeSignal(True) and accountSignal(True)

Also, consider that some tradeSignals might work better than others. It would be interesting if you shared your results. I don't necessarily care for the strategy (unless you're willing), but I'm most curious in what Profits and Losses look like trying to trade 24 markets. Maybe you'll be able to weed out that some tradeSignals (and/or markets) are more stable/profitable than others, and you could just concentrate on the profitable ones.

March 17th, 2021, 03:42 AM

I am learning to code and for that I am trying to replicate the results that the book - The Universal Tactics of Successful Trend Trading: Finding Opportunity in Uncertainty by Brent Penfold.

This way I have a way to compare whether my results are similar or not.

I'll try implementing your pseudocode and see if that helps or not. Thank you.

Question about percentage money management across multiple markets

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Question about percentage money management across multiple markets