I posted the following message on a system vendor’s forum, in response to a question he asked. The question he asked was (basically): "In my system, I am only trading a few futures contracts at a time. But C2 tells AutoTraders that they need a minimum of $65,000 to trade my system without ‘oscillation.’ Why is this?"
For a reason that eludes me, the system vendor deleted my forum post. Because I think this is useful information that will benefit others, I will report it here, but - out of respect to the vendor - will remove references to specific system. I hope this helps people who want to understand more about AutoTrading, oscillation, scaling, and minimum account sizes.
The original post follows:
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I understand the issue of “minimum account size” needed to AutoTrade can be confusing, and sometimes seems inexplicable. The general problem can be summarized as this: there is a conflict between fidelity to the system vendor’s trading instructions and fidelity to the AutoTrader’s scaling preferences.
Let me use an example from your very own system. Recently you had a sequence of trades that looked like this:
BUY 2 Soybean Meal
BUY 1 Soybean Meal
SELL 1 Soybeam Meal
SELL 1 Soybean Meal
This is a perfect example of the challenges of “scaling” your trading instructions for AutoTraders.
Let us put ourselves in the shoes of an AutoTrader. He sees that your system on Collective2 has access to $65,000 of hypothetical trading capital. That means that, in theory, if you went insane, or if your finger slipped on the keyboard, you could type in an order to buy 30 E-Mini S&P contracts.
An AutoTrader that followed your system with 100% scaling – meaning that he instructed C2 to trade 1 for 1 exactly the same quantities that you trade – would therefore also buy 30 contracts.
Now, most AutoTraders will not want to give you access to $65,000 worth of their accounts (or most will not have $65,000 in their accounts). Let’s imagine that an AutoTrader sees your system and says, “It’s a good system, but I don’t want to give the system vendor the ability to place $65,000 worth of trades in my account. Since my account is only $10,000, I’ll allocate $6,500 to this vendor’s trading system.” The trader therefore sets his AutoTrade “scaling preferences” to 10%.
Now, let’s look at how the sequence of trades I mentioned above – a sequence you just recently placed in your system – would play out with 10% scaling.
You say: "Buy 2"
C2 says: "10% of 2 is .2 contracts. There’s no such thing as .2 contracts, so I’ll round this to BUY 1."
You say: "Buy 1"
C2 says "10% of 1 is .1 contracts. There’s no such thing as .1 contracts, so I’ll round this to BUY 1."
So the AutoTrader buys 1. Now he has 2 contracts in his account.
But wait. C2 needs to respect his scaling preferences. He only wants to hold 10% of what you hold. Your system is holding 3 contracts, and 10% of 3 is .3 contracts. Since any number less than one is rounded to 1, C2 says, "Due to the AutoTrader’s 10% scaling preference, he only wants to hold 1 contract. But he’s holding 2. So I need to sell 1 to keep him ‘in synch.’"
Thus C2 sells 1.
From the AutoTrader’s perspective, this is very annoying. He has essentially bought 1, then sold 1, in rapid succession. We call this an "oscillation."
Now, oscillations aren’t the end of the world, but they cost money in commissions and fees, and so a trader doesn’t want to have them too often. That’s why C2 lists the minimum scaling percentage needed to prevent oscillations (or, alternately, the minimu account size needed to trade the system. The two numbers are really different ways of expressing the same math result.)
Systems that “leg into” trades a little at a time, are basically untradable at anything less than 100% scaling. (Well, they are tradable at less than 100% scaling, but traders will have oscillations.)
There is a way to solve this problem, System Vendor. You need to allow traders to trade at 100% scaling. To put it another way, you need to lower the amount of cash available in your C2 system so that an AutoTrader can comfortably follow your system using 100% scaling. Right now, you have $65,000 dollars of cash in your system. How much of that does a trader really need in order to follow your system? $20,000? $10,000? Once you choose your number, you need to give back your extra cash to the bank. This process is called “rescaling your system.” The feature is available through your system page, on the drop-down “ADMIN” menu.
Rescaling will not change your results, since all back history will be rescaled as well (much in the way that a stock split does not really change the value of the company, but simply increases the number of shares while simultaneously changing the per-share value.)
Hope this advice helps.
Matthew
Systems that “leg into” trades a little at a time, are basically untradable at anything less than 100% scaling. (Well, they are tradable at less than 100% scaling, but traders will have oscillations.)
I think it’s not 100% true for stocks. You will have “oscillation” only when you’re not able to buy at least 1 share or a brokers doesn’t support odd lots.
Eu
Oh, sorry, that is absolutely correct. My comments were meant mostly for futures systems.
For stock systems, things become much much simpler. You can basically AutoTrade at any quantity, since most stocks are priced such that even the smallest order (whether legging in or not) can be divided by the appropriate scaling percentage.
Matthew,
An excellent, clear, and extremely instructive post. Your explanation is flawless, and I believe the reason it was erased by that Vendor is that he simply does not want to lower the amount of cash in his system.
And the reason is obvious as well: by keeping a lot of unused cash at hand he smooths out the drops in his performance graph, since any eventual drawdowns are diluted in that sea of parked cash. This makes his system look less volatile. If he were to adjust down his cash available by scaling it down as you recommend, then his volatility would increased markedly.
Of course there is a steep price to pay for this strategy, since not only the drawdowns but also the profits are diluted. So a Vendor keeping cash parked is trading a higher ROI for less risk. It is a strategy that forgoes gain for safety.
Since most C2 Vendors want to show the maximum possible ROI to their audience of possible subscribers, they won’t pursue this strategy of diluting profits and will choose instead higher volatility with the possibility of higher returns.
Only the most gifted of Vendors, with a super system or an uncanny ability to find profitable trades will dare to pursue this strategy. With their exceptional winning record they can achieve a reasonably good ROI for the whole amount in their system, even while risking (trading) only a fraction of it and leaving the bulk of the money quiet there to cushion the impact of their few bad trades. It is a valid strategy for them.
However let’s look at the results as they apply to small investors (like myself).
Following your real life example of a Vendor of a system with $65,000 of cash, let’s say that he trades using at most $13,000 of that (or 20% of what he has available).
That means his subscriber, who is allocating $6,500 to this system, is in fact only getting $1,300 traded (an amount too small for this system, btw).
The difference of $5,200 is just sitting there, unused by this system and not producing any return to the subscriber. And since $1,300 is not enough to trade this system (of futures!), this subscriber is also not getting the same good results as C2 performance records would have him believe. And that’s not good.
The one way I personally go about making sense of this situation with my own account is to study the system to discover how much is actually being used by the Vendor - and then use THAT amount as the max cash available, not what the Vendor tells me.
In this case, it would have been $13,000 and not $65,000. Then I calculate the ratio of used/available money (20%) and apply the inverse (1 / 20% = 5) to reach the proper (full) allocation for this system.
So if I were hypothetical subscriber you describe, I would then apply that factor of 5 to my originally intended allocation. Therefore, instead of allocating $6,500 to this system, I would allocate five times that or $32,500, knowing that if this Vendor keeps his strategy (and his fingers don’t slip on the keyboard!) then he will end up investing in practice the whole amount I truly wanted him to, or $6,500. Of course, with that the ROI (and the risk!) will also increase 5 times.
I hope that by sharing my strategy I will be helping investors who like me are dealing with vendors that are gifted but somewhat too conservative and less risk-averse than I am.
and that is why no vendor should be allowed to erase forum posts. It takes away from the objectivity of C2. They will prune negative posts and favor positive posts.
If an inappropriate post is made, the vendor should request that MK delete it. And the vendor should haeve significant leeway to make such a request.
Please allow me to chime in here, as it is the Trending Futures system we are discussing.
I haven’t had any trouble to date with user posts, but I do see a potential for C2 user abuse in regards to posting of spam, ads, touting, disrespect, etc… Matter of fact, I do not see a way for me to “delete post” security on my account, if in fact I am or should have that type of access? I’m not sure who has the security access to delete a C2 post to be able to delete them, but I can assure you that it was not me that had deleted a post you had made. So, I’m not sure where your post went Matthew, as I did not delete any post, nor would I delete one ahem, from you. 
Having the ability to modify the posts with “edit” and / or “delete” capacity in a vendor forum(s) as a vendor of a system forum is a good idea to avoid potential abuse however IMHO, so I would appreciate having that type of moderation ability is appreciated if the C2 system permits it.
In regards to the scaling issue, thank you for the thoughtful response to this issue. This is a good discussion we are having, and I would like to pose a simple solution to it for those of us vendors that have to respond to these questions of “how much $ do I need to trade your system” …
I have in fact scaled the system down from 100k to $50k a while back, which which put the starting capital at around $30k. I had to wait for a while before doing so, for there to not be any trades in the system to accomplish this rescale of my system, and after the fact I wish I hadn’t done so, as it introduced additional problems for my system. It seemed to bring into the equation some other bugs and weirdness for the TF system which need to have light shed on them.
For example a lot of old trades immediately popped into the TF system that concerned me. I immediately canceled them all which seemed to fix the problem as no sub contacted me with any issues. I think that was also the time period when this “risk of account loss” > 20% started showing up which has been a major source of frustration for me due to the fact that the C2 technology places such strong emphasis on that piece of data which is debatable as to how important it is taken by itself as we have discussed this in the past without resolution to date.
In any case, the solution to the “scaling confusion” is to simply allow as a system vendor the ability for the vendor to turn off the ability for subscriber scaling which would in turn not display all that confusing mumbo jumbo regarding account oscillation.
This simple toggle switch, if you will, would simply put an end to the confusion once and for all.
If someone can’t do a trade as it is instructed, then as a vendor I would want them to pass on the trade. I think somewhere needs to be an “recommended account range” value that as a vendor I can display.
As for trending futures, this value would be between $30k-$50k is what I would recommend someone to use to avoid any type of potential issue.
Also, if someone can’t do the trade as instructed with the proper amount of contracts, then they should pass on the trade and not do it.
Forget scaling - my system should not be allowed to scale.
I need to have control to tell subs / potential subs not to be trying to scale somewhere in my system specifications.
The vendor should be allowed to make that choice up front to scale or not, because I can tell you this is a very confusing subject and I get private messages from subs or potential subs about it all the time - “how much $ is needed to trade the system”.
I think we can all agree that successful trading is difficult to accomplish. I don’t mean to be rude to anyone, but as a discretionary trader, It takes me hours / day to review the technical analysis on charts, do my research, etc… to run my system successfully. I review each trade margin requirements individually to decide specifically how many contracts to use so that my subs don’t’ have to worry about such things.
The last thing I need or should be having to do is spend additional hours trying to simplify the confusion that C2 displays to subs or potential subs through continued messages back and forth about what the hell “account oscillation” is.
As well as to continually address the issue as to how come C2 is telling them that they need the max amount of cash in their account as my system has to be able to trade with it.
I mean c’mon now let’s get real fellas!
Again… The logical solution.
******* please consider to allow a system vendor to turn off the ability for subs to chose to scale a system. That would end the confusion of “account oscillationin” in its entirety. *****
******* please allow a field somewhere in C2 to set a range of minimal trading account value to commit as recommended by vendor ie. $30-$50k as in the case of Trending Futures *******
These two “c2 system enhancements” alone would end a tremendous amount of confusion that takes place around here day in and day out.
Thanks and have a good evening all.
at
AT:
That is an interesting proposal, albiet one that I doubt will be real popular.
For futures systems in particular, the capital required is the sum of the largest amount of margin that will be used plus an allowance for drawdown. For example, using a hypothetical balance of $50K, a system may use at most $20K for margin and hold $30K in reserve for drawdown. As a modification to your idea, AT, perhaps there should be a setting for the maximum amount of margin that the system can use. I mean a voluntary cap by the vendor. The subscribers could then use their own judgement as to how to capitalize their account and scale the system. In the example given above, a subscriber could fund the account at $20K with 100% scaling and know that he would not get a margin call for too large of a position size. (Yes, I know, under funding an account to that extent will likely get a margin call anyway just from normal market fluctuations.). Or a more likely scenario would be if a subscriber had a $25K account at his broker, but had another $25K in cash, CDs, or whatever. Should there be a system drawdown, he could transfer some extra into his trading account. That’s how I handle my own futures trading accounts - I keep just what I want to trade with in the actual account and the rest I keep in liquid reserves for whatever opportunities may come up. I suspect others here do that as well. It’s doubtful that anybody has their entire investment nest egg solely at their futures broker!
Just food for thought, I really have not thought this all the way thru.
Hans.
One of the best features of C2 is its ability to allow traders to create their own portfolio of different systems to accomplish their individual investment goals.
And this thread has become an interesting and illuminating discussion on an issue that affect all C2 traders who decide to subscribe to multiple systems and are then faced with the decision of how much to allocate to each one.
For that, the option of scaling investments in each system is an essential tool and must not be removed.
While it is refreshing and balanced to view the situation from the Vendors point of view, as above, giving the Vendor the power to unilaterally decide how much I should invest in his system is unacceptable. It is my money and I make that decision.
Give me advice, if available, but then let me decide how much to like it. For instance, the notion that one should invest at least $30,000 in futures is a sound one, and this information could easily be added by the Vendor to his system description field for all to read before subscribing.
That would free up the Vendor from having to answer the funding question repeatedly while keeping subscribers informed and responsible for their final funding decision.
In my understanding this is one of the central ideas behind C2.
Excellent idea, Hans.
By separating two types of traders you give each group the freedom to trade as they see fit.
The first group is the low risk, conservative one who will be well served by letting the system vendor manage their margins for them, as AT said he is carefully doing already. Those traders will be happiest if not bothered with margin calls or brokers liquidating their positions, even that peace comes at the cost of a lower return.
A different group of traders will want to know that the money they put in a system will be mostly (if not even fully) invested, to accomplish their goal of maximized return. They don’t need padding from market realities, and as you mention they are typically seasoned investors who understand diversification, are already diversified, and don’t need more of it within a system. They will also be more active and willing to fund eventual margin calls as they come. For their trouble they will make more money.
One way for C2 to inform these two groups of their options is to make a new number available for each system, this one describing how well the capital in a system is actually utilized and with what frequency it is fully used.
Similar to the
Risk of 20% account loss 0.0%
Risk of 50% account loss 0.0%
Risk of 100% account loss 0.0%
There should be a:
Time 40% of capital is invested 84%
Time 60% of capital is invested 42%
Time 80% of capital is invested 3%
Time 100% of capital is invested 0%
And for those systems that use margin beyond their stated capital, C2 could add:
Time 125% of capital is invested 74%
Time 160% of capital is invested 36%
Time 195% of capital is invested 3%
Of course, a Cartesian graph of capital amount vs utilization rate would be even better, and would also neatly illustrate how consecutive trades that overlap are affecting capital usage and minimum capital requirements.
Such graph would visually describe very well how a Vendor utilizes the capital and the margin entrusted to them, and it has the potential to become the most important tool when the time comes for an investor to decide how much to allocate to an individual system.
I truly hope to see this implemented in C2.
Mathew this last post was a stroke of Genius. Please consider implementing this.
Thanks Rick Hanes
[LINKSYSTEM_32217174]
R M:
What I had in mind was not merely another statistic, but rather a C2 enforced margin maximum. The vendor would set this value, but if he chose not to use this feature it would simply default to the full account balance. This way a system with a hypothetical balance of $100K could have a self imposed margin limit of $25K. A subscriber is then free to trade it with $25K, $50K, or $100K as he sees fit. Or he could trade with $60K using 200% scaling knowing that he will not see any position sizing surprises. Someone with $40K could safely trade it at 100% scaling and thus avoid the trade "oscillations" that can occur with less than full scaling.
Currently a vendor can put in his system description expected margin requirements, but what assurance is there that he will not exceed them? A C2 enforced limit will allow the subscriber to sleep just a bit better at night, comfortable in the knowledge that his autotraded vendor will not go wild with some large position.
I, for one, would use such binding self imposed margin limits with my systems. Of course, there would have to be some method of adjusting them, perhaps utilizing a several day waiting period before the new limit takes effect so the subscribers can react accordingly.
Hans.
Richard,
It is an honor that you consider my idea a “stroke of Genius”, since I truly admire your style and I’m proud to say I subscribe to both your Ultimate Trader and Conservative Growth.
Thanks, Master, for growing my money and for supporting for an idea whose time has come!
RM - thank you for the suggestion. I have added this detail to the TF system description to hopefully help lesson the confusion there.
Also, this is terrific discussion gents. Hat’s off to each of you for the value of these observations and suggestions to help better the C2 community for each of us that come here each day to work in the attempt to make consistent profits over time to better ourselves and our families financial future!!!
I even question the value of the equity curve. I think there are two kinds of system, those that pyramid, and those that don’t. For those that do, the compounding equity curve is obviously useful.
For those that don’t, I don’t see any value in it; I’d far rather just see a graph of daily profit/loss, without the account value compounding.
As a subscriber, I want to know how much margin I need, how much drawdown I should cater for, both intra-trade (ie I absolutely need this much in my account), and over a period (I can always top up my account if things start turning bad), and how much profit I can expect to generate. Of course I then want all the other stats in order to measure performance etc.
I think AT is right that the re-scaling feature doesn’t work for systems that don’t pyramid. You end up with trades of 0.7635 contracts and so on in the history, and you have no idea how many contracts were ACTUALLY traded at the time, because you don’t know the rescaling factor.
"…That’s why C2 lists the minimum scaling percentage needed to prevent oscillations …"
As a newbe, I’m having trouble finding the “…That’s why C2 lists the minimum scaling percentage…” data on the website - where is this data located?
It is described in the AutoTrade setup page (i.e. the page you see after you subscribe to the system and decide to AutoTrade it.) I have received several requests to have this data listed up-front, on The Grid, or on the system details page, so that people can know the information before subscribing. I will try to add that shortly.
