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"Jess O'Leary" <jesso@xxxxxxxxxxxx> wrote:
> AccountRisk = NetProfit * RiskPercent;
> Num = AccountRisk / WorstCase;
> If Num < 1 then Num = 1;
>
> RiskPercent is the percentage of net profits that you want to risk,
> and WorstCase is a worst case stop loss. In other words, aside
> from gaps that go against you WorstCase is the biggest loss the
> system will tolerate.
That's a reasonable approach (I would use TotalAccount rather than
NetProfit, but that's a minor quibble), except for one thing: how do
you set RiskPercent?
If you just randomly pick a number, you're almost certain to choose
too large. Typical traders, especially daytraders, tend to want to
leverage way too high. Doing so increases your chances of ruin,
possibly to 100% if you choose too high.
Optimal f is an attempt to come up with the "correct" value of
RiskPercent. Trade above optf and your results will be suboptimal --
trade too much above optf and you will go bust.
But optf isn't the perfect answer either, because it relies on past
trade history and then maxes out your risk based on that history. If
you get a loss that's significantly larger than your previous maximum
loss -- specifically, if it's more than 1/f larger than your past
largest loss -- trading at optf will bankrupt you.
optf is a reasonable starting point to get an idea of the absolute
maximum level of leverage you should use. Nobody in their right mind
would trade AT optf. But it gives you at least a ballpark estimate
of where it MIGHT be safe to trade. Maybe optf/4 is a reasonable
place to start.
> there's one thing that bothers me ... and that's the fact
> that the worst case stop loss varies based on the number of
> contracts one is trading. For example, if you're trading one contract
> and have a worst case stop loss of say $1000, that's fine and dandy,
> but obviously one isn't going to use the same $1000 stop loss if 5
> contracts are being traded.
Sure you would. If a $1000 stop makes sense for the trade, then it
makes sense for the trade whether you're trading 1 contract or 100.
That's not a $1000 loss for the **entire trade**, but $1000 PER
CONTRACT. So if you trade 5 contracts, you're risking $5000. If
$5000 is more than you want to risk, you shouldn't be trading 5 cars.
Gary
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