Portfolio Selection - Small (<50k) Trader
Posted: Mon Apr 21, 2003 11:22 pm
I apologize in advance if this question/comment seems a little "tactical."
I have some possible alternatives for people (like me ) with small accounts. I do agree that it is difficult to deal with the large amount of risk that an average futures contract exposes a small trader to - a T-note contract can swing $1,000 in a single day (5% of a $20k account). Currency futures are similar. Some meats and grains are better, but there are very few markets which have acceptably low contract sizes/volatility.
My recommended solution is one or a combination of three alternatives.
1) Low volatility commodities:
-Corn/Oats
-Soybeans (maybe)
-Eurodollar
-Sugar
-Cocoa (although not lately!)
I'd like people's feedback on mini-contracts - The small size makes the flat commission rate/contract a pretty high % of ATR!
2) Currencies on OANDA (no minimums - position sizing to the exact dollar)
Pick 3 crosses which touch all six of the following - but don't repeat:
-USD
-GBP
-EUR
-JPY
-CHF
-AUD or CAD or ZAR
Three crosses can be set up to have almost zero correlation. Since everything is relative, an economic shock won't take all of them down (read Fooled by Randomness for a new appreciation of economic shocks!)
3) A stock ETF, such as SPY or QQQ (not both)
I think that stocks are far more correlated than people think - that's why there were so many "geniuses" in the last bull market - EVERTHING was going up (and then came crashing down)! If the market trends nicely, trade the whole market.
//End Strategy//
My rationale? Correlation, correlation, correlation. I have done simple betsizing simulations in excel, and I have come to two conclusions:
1) Max drawdown is a direct function of %losing trades + % bet per trade.
2) Rate of return is expectancy + # of trades per annum + % bet per trade.
Therefore, a profitable system needs more positive trades, and a "safe" system needs short losing streaks, with minimized betsize per loss.
In order to get a lot of trades, a futures trader needs to be in a lot of markets so they can catch a lot of trends. Unfortunately, being in too few markets will lead to a probability of no trends. More importantly, they need to be in multiple non-correlated markets so they aren't simply doubling and tripling their betsize.
If one trades two correlated markets (e.g. T-Bonds and T-Bills) that person is simply doubling their bet.
The method described above seems to scratch together enough low-correlation markets (with acceptable risk parameters) to make a go of it.
OK, time to stop blabbering
I have a few "issues" with this strategy
1) Brokers - I would have to spread my meager capital among multiple brokers (Interactive Brokers comes the closest to an integrated platform, but doesn't offer spot currencies or softs/grains)
2) Spot FX margin - Contrary to popular belief, most spot FX dealers let you use less leverage than the futures exchanges. OANDA at most gets you 30:1, but a yen contract on the IMM can be had at 50:1. I am "trading" on their FXGame platform, and see that, with a 2N stop, 1 unit takes 5% of my equity. That means that only 3 "loaded" pairs will use up 60% of my equity on margin (3*4*5%) Not a lot left over for much else!
3) Commodity choices - Is there something missing about small account sizes? Does the system degrade because 1.68 contracts rounds down to 1 or simply because there aren't enough markets to find trades?
Two alternatives
1) Go "whole hog" with Spot FX, knowing currencies are very trendy, and I can get low correlation. Are three non-correlated pairs enough?
2) Find an acceptable mix of commodities/mini contracts, and perhaps single stock futures (liquidity problems?) without FX and accept less control over exact position-sizing.
Please comment on my portfolio/issues/alternatives.
OK, this time I really am going to stop blabbering!
I have some possible alternatives for people (like me ) with small accounts. I do agree that it is difficult to deal with the large amount of risk that an average futures contract exposes a small trader to - a T-note contract can swing $1,000 in a single day (5% of a $20k account). Currency futures are similar. Some meats and grains are better, but there are very few markets which have acceptably low contract sizes/volatility.
My recommended solution is one or a combination of three alternatives.
1) Low volatility commodities:
-Corn/Oats
-Soybeans (maybe)
-Eurodollar
-Sugar
-Cocoa (although not lately!)
I'd like people's feedback on mini-contracts - The small size makes the flat commission rate/contract a pretty high % of ATR!
2) Currencies on OANDA (no minimums - position sizing to the exact dollar)
Pick 3 crosses which touch all six of the following - but don't repeat:
-USD
-GBP
-EUR
-JPY
-CHF
-AUD or CAD or ZAR
Three crosses can be set up to have almost zero correlation. Since everything is relative, an economic shock won't take all of them down (read Fooled by Randomness for a new appreciation of economic shocks!)
3) A stock ETF, such as SPY or QQQ (not both)
I think that stocks are far more correlated than people think - that's why there were so many "geniuses" in the last bull market - EVERTHING was going up (and then came crashing down)! If the market trends nicely, trade the whole market.
//End Strategy//
My rationale? Correlation, correlation, correlation. I have done simple betsizing simulations in excel, and I have come to two conclusions:
1) Max drawdown is a direct function of %losing trades + % bet per trade.
2) Rate of return is expectancy + # of trades per annum + % bet per trade.
Therefore, a profitable system needs more positive trades, and a "safe" system needs short losing streaks, with minimized betsize per loss.
In order to get a lot of trades, a futures trader needs to be in a lot of markets so they can catch a lot of trends. Unfortunately, being in too few markets will lead to a probability of no trends. More importantly, they need to be in multiple non-correlated markets so they aren't simply doubling and tripling their betsize.
If one trades two correlated markets (e.g. T-Bonds and T-Bills) that person is simply doubling their bet.
The method described above seems to scratch together enough low-correlation markets (with acceptable risk parameters) to make a go of it.
OK, time to stop blabbering
I have a few "issues" with this strategy
1) Brokers - I would have to spread my meager capital among multiple brokers (Interactive Brokers comes the closest to an integrated platform, but doesn't offer spot currencies or softs/grains)
2) Spot FX margin - Contrary to popular belief, most spot FX dealers let you use less leverage than the futures exchanges. OANDA at most gets you 30:1, but a yen contract on the IMM can be had at 50:1. I am "trading" on their FXGame platform, and see that, with a 2N stop, 1 unit takes 5% of my equity. That means that only 3 "loaded" pairs will use up 60% of my equity on margin (3*4*5%) Not a lot left over for much else!
3) Commodity choices - Is there something missing about small account sizes? Does the system degrade because 1.68 contracts rounds down to 1 or simply because there aren't enough markets to find trades?
Two alternatives
1) Go "whole hog" with Spot FX, knowing currencies are very trendy, and I can get low correlation. Are three non-correlated pairs enough?
2) Find an acceptable mix of commodities/mini contracts, and perhaps single stock futures (liquidity problems?) without FX and accept less control over exact position-sizing.
Please comment on my portfolio/issues/alternatives.
OK, this time I really am going to stop blabbering!