One of my favorite trading blogs is Move the Markets and this article is an example of why I like it so much. I was just applying the formulas in the article to my ATS.
As I mentioned before, we started with $10,000 and will begin risking 2% per trade (ironically this is the same percentage that Tyro’s friend used before he went bust). How many consecutive losses can our account sustain before dropping below $4000? Based on Richard’s formulas we would need 45 consecutive losses to drop below $4000 and 34 consecutive 1R losses to drop below $5000.
I will be adjusting the risk per trade percentage down gradually to eventually 1% or below, as (or “if”) the account grows. So, if we can get to $20k (100% profit), with the new risk per trade it would take 39 consecutive losses to bring us back down to $10k. At $50k, it would take us about 70 consecutive losing trades in a row to bring us down 50% (to $25k).
Basically we are hoping that we have built an ATS that is able to, with luck, grow large enough quickly enough before it runs into a streak of about 40 losing trades in a row. That’s not including commissions or slippage.
If we were to start out risking only 1% per trade, we would have a much less chance of ruin.
But here is a chart of what the account would look like after a string of 100 consecutive winning 1R trades (with a fixed percent risk per trade):

The blue line represents a risk of 1% per trade and the pink line is risking 2%. Obviously the growth is much faster with the higher risk per trade.
It’s interesting to think about this because understanding and determining these variables is so important to the success of the ATS, yet it has nothing to do with the system that we made. The ATS that we programmed looks at stock price and volume. How important is that? Well, it has definitely been about 99% of the work, but really it just has to be good enough so that, with luck, it has a better chance of not running into a streak of about 40 losses in a row too quickly.
And it has to make more money than it loses.

This entry was posted on Monday, February 19th, 2007 at 3:46 am and is filed under ATS. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.