Hello guys,
I’m new here and I’ve been following [LINKSYSTEM_33841014], the future system. How do I correctly adjust the system to trade a 5000$ account? Or even a 2500$ account? I want to avoid the pitfall of not being able to follow every trade the system makes because of a smaller account size.
Thank you for your help!
You can’t. eQuants cannot be scaled because many orders are for 1 contract, it legs in and out of trades.
Depending on your broker, you may be able to follow most trades with as little as $5,000, but you’d be terribly leveraged.
Thanks,
so do you suggest sticking to forex and stock systems for small accounts because of easier scaling purposes?
I personally would not trade any system with less than $10K. The risk of ruin is just too great. Even with that amount, you’ll still be risking a significant percentage of equity on each trade, regardless of the system.
So is there a rule of thumb?
If the system is trading a hypothetical 100K account, the min you should autotrade on it is 50K. If the system is trading with a 20K account then it is safe to use half that, 10K account to autotrade with it. At what point will a system not be scalable to a smaller account? How do I figure that out?
Thanks for the replies!
There is not really a precise rule of thumb, but I once saw a good study showing direct correlation between trading success and trading account size (note, I do not have a copy of the study, I saw it years ago)
Basically, the more leverage you have, the faster you are likely to blow up. Small accounts by necessity, are highly leveraged.
Ok lets take the opposite then,
Let’s say I want to trade a system which starts at 10K hypo… And I want to scale it to trade my whole 100K account. How do the risks play out now? Is it less or equal to the system itself?
Ok lets take the opposite then,
Let’s say I want to trade a system which starts at 10K hypo… And I want to scale it to trade my whole 100K account. How do the risks play out now? Is it less or equal to the system itself?
If you are trying to establish an account size, here is what I’d do:
1. Determine your drawdown threshold. This is a personal choice - are you comfortable losing 10% of your account money? 25%? 50%? 80%? Think long and hard about this. Then divide this number by 2. For example, if you tell yourself “I can handle a 80% drawdown before I quit” chances are you’ll panic and quit at a 40% drawdown. You might think “oh no, that doesn’t apply to me,” but saying you can handle an 80% drawdown and actually living through it day by painful day are two entirely different things. So, for this example, let’s say you pick 80%, which really means 40%.
2. Find a system with at least 6 months of real time results that you like. Find its maximum drawdown. Double it. The reason for this is the old saying “your worst drawdown is always ahead of you.” So, for this example, find a system with 20% maximum drawdown, double it to get 40%. Keep in mind that the drawdown will depend on the initial hypothetical account size and the equity at the start of the drawdown. If you had double the equity at the start of the drawdown, and traded the same size as the system, your drawdown would be half of that shown.
3. Now, you’ve got a system where the predicted future drawdown = your quitting point drawdown. That’s good - the proposed system actually meets your goals/objectives. This is important - I bet 90% of people never check that the system fits them. That’s one reason they give up.
4. Look at the system, what it trades, how many contracts, etc. Make sure you will have enough margin in your account to open a new trade AFTER the 40% drawdown. As an example, let’s say the system you want to trade trades 1 mini S&P (ES). Exchange minimum (not day trade rate) is $6188. So, 6188/(1-.4) = $10313. So, if your account had roughly $10500 in it to start, you could endure a 40% drawdown and still make a trade.
This is a very simple analysis - I usually do much more complicated things like Monte Carlo analysis to help determine account size. But that’s a whole book in itself.
I hope this helps.
Wow Kevin, that was a great way to look at it. Thank you,
Craig
I would also add:
5. Take the amount of leverage you plan to use for a system. Look at how much you plan to commit to system. from your account. Then, cut it in half.
6. If you NEED to get the profits, that is called “scared money.” Many people do not heed the concept of using money you can afford to lose, and wind up sending all their spare cash to their broker for trading. When I see people asking if they can trade with $3000, I usually suspect they cannot afford to lose it.
7. When looking at a system with a small account, don’t forget what the effect of paying $700 a month subscription fees will do to your expected earnings.
8. Most “profitable” systems you see when you look at C2 or any other site, will stop working when you start trading it. That is because it was lucky, pimped, etc.
The real position size to trade 1 es contract is usually $50 per point times the number of points in a contract. Obviously you don’t have that kind of money to trade it, so I would agree with Ross generally you probably aren’t in a position to risk it.
Sure you can trade with $5,000, but that’ll go down the tubes pretty quickly because you’re leveraged at 10:1 in reality on the index. Think about it this way: I don’t know any trader that doesn’t lose at least 2% on a single trade. That 2% is about 20% of your capital to you, and don’t let them tell you that they can’t lose that much because they’re lying to you.
The Dow Jones futures may be a little better, but again small account sizes are much more likely to blow up than make money.
I suspect maybe trading SPYdrs or DIAmondw (index ETFs) is preferrable…
Index,
Re: "8. Most "profitable" systems you see when you look at C2 or any other site, will stop working when you start trading it. That is because it was lucky, pimped, etc"
… or, is it all the new influx of cash into the system that cripples it
Well I actually have the money to do these 10, 20k systems. I was just wondering if I could just dip my toe in it first because it’s my first swim.
Thank you for all the responses so far. So my takeaway is if I use an account that matches the systems’ capital, then I should be most safe then right? And most safe is the risk and capital management factor. Scaling down would just increase the chances of blowing up the account.
Am I right?
You can do any ETF based system, anyway, quince. I’m not sure why you’re caught on overleveraging yourself with the trading class of systems that blows up the most often for exactly the reasons we’ve described to you.
