ATMASphere Aug 2014

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method that we will follow. Now why is money management important? Determining how much of a currency, stock or commodity to buy or sell on a trade is an often overlooked aspect of trading. Traders frequently take a random position size; they may take more if they feel "really sure" about a trade, or they may take less if they lack sufficient conviction. These are not valid ways to determine position size. A trader should also not take a set position size for all circumstances. Many traders take the same position size regardless of how the trade sets up, and this style of trading will likely lead to underperformance over the long run. Though there are quite a few money management methods bordering on the sublime to the ridiculous, we will take the Fixed Risk Position Sizing method for simplicity Hence the quantity the trader will trade is x/R = 20000/50 = 400 Nifty fut. Situation 2: SL is 20 points Hence the quantity the trader will trade is x/R = 20000/20 = 1000 Nifty fut. Hence, by following a fixed risk per trade a trader’s position size varies as per the risk though his absolute risk of loss remains the same per contract. This method, though deceptively simple will beat any fixed lots method. Another major advantage of this system is that it will ensure much lesser drawdown on equity compared to a fixed lots method. Fixed Risk Position Sizing 1. Let us assume that the trader is ready to risk x amount per trade 2. His system provides a precise stop loss ( R) ( this is terribly important as no money management is possible without a clearly defined stop loss point) 3. Hence, his position size per trade will be x/R 4. Let us explain this simple concept with an example. Say a trader trading Nifty futures as per the Trend Breakout System is willing to risk Rs.20,000 per trade Situation 1: SL is 100 points. Hence the quantity the trader will trade is x/R = 20000/100 = 200 Nifty fut. Now in order to back test our system, let us make the following assumptions: 1. We use a net capital of 3 lacs. This comprises margin equity of 2 lacs and risk equity of 1 lac 2. In intraday trading, brokers allow day trades (to be compulsorily squared off before market close) on a margin of Rs.10, 000/- per contract of Nifty. Hence, a 2 lac margin allows us to trade up to 1000 Nifty fut. ( 20 lots) on an intraday basis 3. Our risk per trade will be Rs.20,000/- ( why Rs.20,000 and not any higher or lower figure will be clear and will be explained in the next part of this series once back testing is completed ) Situation 2: SL is 50 points AUGUST <strong>2014</strong> ATMASPHERE | 16
Back testing on Nifty futures data shows the following results at first run of analysis: Graduated with Economics with post grad in Business Management. 12+ years experience as a trader and analyst. Was the Head-Research and Director-Algorithmic Strategies for one of the biggest commodities prop firms in India. Now manage own and prop money based upon self developed algorithmic strategies ….www.quantgym.com Sounds too good to be true? It probably is .Please check it yourselves and try to find the loopholes in this back test. I will continue with back testing, associated problems and their solutions, robust & stress testing the system in the next parts of this series. AUGUST <strong>2014</strong> ATMASPHERE | 17
Page 2 and 3: CONTENTS Letter from the President
Page 4 and 5: EDITOR’S NOTE In this issue - 1.
Page 6 and 7: 2. Symmetrical Triangles: These are
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