I have devised another method of protecting your account from under performing systems whilst emphasising profitable systems. This is especially applicable if you use several systems and are introducing new systems that you do not 100% trust in a real trading even after you have paper traded them. It wouldn't be the first time that a system that backtested, forward tested and paper traded suddenly started to go pear shaped after it went 'live'!
It is similar to the Fryers Aggressive Risk formula I posted a few weeks back but instead of dividing your account up between safe and aggressive sections, you divide your account between systems you are using!
e.g. if you are using 6 systems you would divide your account into 6 equal portions at the beginning of every 6 month or year, or whenever a new system is introduced. You will now view your account as not 1 account but 6 virtual accounts. These virtual accounts cannot effect the other accounts, no matter how poorly (or well) they are performing.
For each trade signalled for a particular system you can risk a percentage of its virtual account. e.g. £20,000, 6 systems = £3333 virtual account size each. 10% risk per trade = £333.
You would have to use a spreadsheet to keep tabs of each systems virtual account size, with a column to display the allowed risk.
When a system profits, its profit is added to its virtual account alone and when it loses it is likewise decremented from the account.
This method will allow the systems that are performing well to rapidly increase the amount of risk allocated to them, and likewise will dramatically reduce exposure to failing systems! Systems are rewarded by being allowed to use profits that only they have produced, and the most damage a failing system can have on your account is known from the start (in the above case a 1/6th of your trading account).
This is only usable if you have different strategies and methods using the same account funds. By increasing the risk factor from 2% on each virtual account we are actually accelerating our potential profitability (and simultaneously reducing risk) when this is waranted. The 10% of a virtual account that is rapidly expanding becomes a lot larger than 2% of the entire account. This is especially the case if a poorly performing system is destroying all profit of the profitable systems. With this method, a poorly performing system would not be able to effect the other systems and exposure would be reduced considerably quicker.
An example will clarify this point:
With an initial account size of £20000, risk is 2% = £400
1/6 = £3333, risk 10% = £333
An underperforming system (no 1) produces -£1000 loss whilst a good system (no 2) is producing £1000 in profit in the same period (on average). We have a stale mate situation if both systems use the same account and the risk allocated for each system is equal.
With an account divided virtually between the two:
System no 1: £3333 - £1000 = £2333 * 10% (risk) = £233 (much reduced trade size)
System no 2: £3333 + £1000 = £4333 * 10% (risk) = £433 (increased trade for accelerated profit).
Compared to using 2% risk of the entire account, each would be allocated £360.
(Note: the risk/trade size is only for that virtual account not the entire account. If a good system with larger trades starts to destroy its account the other accounts are safe and its risk factor will naturally be reduced)
After a short period of time the underperforming system has its impact reduced on the account, meaning in the above situation a stalemate would give way to an acceleration in profits, with emphasis given to the better performing system.
Reduced overall risk, increased aggression and profitability.
What do you think of this method?
It is similar to the Fryers Aggressive Risk formula I posted a few weeks back but instead of dividing your account up between safe and aggressive sections, you divide your account between systems you are using!
e.g. if you are using 6 systems you would divide your account into 6 equal portions at the beginning of every 6 month or year, or whenever a new system is introduced. You will now view your account as not 1 account but 6 virtual accounts. These virtual accounts cannot effect the other accounts, no matter how poorly (or well) they are performing.
For each trade signalled for a particular system you can risk a percentage of its virtual account. e.g. £20,000, 6 systems = £3333 virtual account size each. 10% risk per trade = £333.
You would have to use a spreadsheet to keep tabs of each systems virtual account size, with a column to display the allowed risk.
When a system profits, its profit is added to its virtual account alone and when it loses it is likewise decremented from the account.
This method will allow the systems that are performing well to rapidly increase the amount of risk allocated to them, and likewise will dramatically reduce exposure to failing systems! Systems are rewarded by being allowed to use profits that only they have produced, and the most damage a failing system can have on your account is known from the start (in the above case a 1/6th of your trading account).
This is only usable if you have different strategies and methods using the same account funds. By increasing the risk factor from 2% on each virtual account we are actually accelerating our potential profitability (and simultaneously reducing risk) when this is waranted. The 10% of a virtual account that is rapidly expanding becomes a lot larger than 2% of the entire account. This is especially the case if a poorly performing system is destroying all profit of the profitable systems. With this method, a poorly performing system would not be able to effect the other systems and exposure would be reduced considerably quicker.
An example will clarify this point:
With an initial account size of £20000, risk is 2% = £400
1/6 = £3333, risk 10% = £333
An underperforming system (no 1) produces -£1000 loss whilst a good system (no 2) is producing £1000 in profit in the same period (on average). We have a stale mate situation if both systems use the same account and the risk allocated for each system is equal.
With an account divided virtually between the two:
System no 1: £3333 - £1000 = £2333 * 10% (risk) = £233 (much reduced trade size)
System no 2: £3333 + £1000 = £4333 * 10% (risk) = £433 (increased trade for accelerated profit).
Compared to using 2% risk of the entire account, each would be allocated £360.
(Note: the risk/trade size is only for that virtual account not the entire account. If a good system with larger trades starts to destroy its account the other accounts are safe and its risk factor will naturally be reduced)
After a short period of time the underperforming system has its impact reduced on the account, meaning in the above situation a stalemate would give way to an acceleration in profits, with emphasis given to the better performing system.
Reduced overall risk, increased aggression and profitability.
What do you think of this method?
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