PayoffMatrix:
You are correct that I miss-spoke about leverage. I do know what the ES contract is worth, since I have been trading it since 2002, but I was using the full overnight margin requirement when I calculated the leverage. When I traded professionally as a CTA, we assumed $25K per ES contract, which at the time was 5X the exchange minimum overnight margin.
As you well know, futures contracts in reality have no intrinsic value themselves, only the cash contrac does. The margin that is offered is actually just a “good faith” deposit that you will pay the same day any losses come daily settlement time. At the settlement time, all holders of the contract must be balanced with the clearing exchange.
Again, I am sorry for any confusion. I was directing my comments to exchange minimum margins. Now just to say that I’m really crazy, after I wrote that post above, I decided that I would decrease the minimum account trade size to 10K for this day trading portfolio. Most brokers require 25% to 50% margin of the exchange minimum for day trading, so I reduced the recommended account size to $10K.
So versus my day trading margin (good faith money) the minimum account would be 3X the broker day trading requirements. Probably a mistake but I can’t go back an increase it back to $25K. The returns both negative and positive will be amplified in this account, so again, probably a mistake.
As to stops, I was just providing full disclosure to the community. I did trade this program through the early part of February in my own account and did have one day that was a $1.7K loss, but in the same week had a $2.5K gain. That was the first time I have ever made 100 points on one day trade contract in one day.
Further, I do not agree with you on stops. Every time I use them in the past I have been screwed. That is why I recommend $25K per ES contract as trading capital if you are going to stay overnight. Here is just one example. I typically develop trading systems over a 17 year data span, with on 60% of that data as the training portion. The other 40% is utilized as follows: 25% for out of optimization testing and then a final 15% of the data that is never used in development but used as a validation segment on the final review of the strategy.
I typically throw away any strategies that don’t have similar equity curves in the testing phase (25%), and meet typically stringent Monte Carlo statistical testing sensitivity analysis and many walk forward tests.
The final test is to use the validation period to see how it performs over that. In this environment, a typically day trading system over the period without stops has a performance of around $165K, a PF of > 2 and a % profitable of > 60% with a maximum DD of 3.3K over its life. Obviously with a 10K or 25K account size the DD is well within particulars. If you want a DD of 10% or less, then allow 30K capital for this strategy. I am not sure about this strategy as of yet, but the proof in the pudding is to actually trade it with real $. That is what I am doing now and have included Collective2 community to follow along.
The best that I have achieved in the past with a day trading system that utilized a stop of $1K, has been half that total performance, with similar PF and % profitable and a similar maximum draw down, so I see no benefit to using stops.
I will continue to trade this in real time to measure its actual real results with the historical data and if it fails, it fails.
Thanks for your comments and hope this gives you some indication of my thinking behind trading E mini’s.