Resolved Question
What's a simple way to calculate optimal drawdown?
I am autotrading and have set the rules with my signal providers as follows: 1) no more than 20% of my fund in total should be open in trades and 2) each signal provider on my account is limited to 1 open trade at any given time and 3) no more than 2% of my fund should be used for any 1 trade.
Question: the autotrading service allows me to set a stop loss per signal provider. Assuming all of my signal providers trade with 100% accuracy what is a quick and easy way to calculate the optimal drawdown to set per signal provider?
I have historical data on all trades executed by my signal providers. Using excel I did the Mean (average), median, and mode of the max realized drawdown per trade by each signal provider. I was going to use the formula Stop-loss per lot = avg(max drawdown / lot) * 1.2.
The idea is if they eventually win most trades, I want to let them draw down enough to most of the time but protect myself from the minority of the time when they have really high DD. THX
over 3 years ago
Best Answer - Chosen by Voters
I hope I understood your question correctly... You're asking what is the optimal stop you should set before your trade is automatically closed?
I don't think there's an "optimal" drawdown because it all depends on each systems statistics. Some systems would win 50% of the time but have a 2:1 profit-loss ratio while others could have a 20% win ratio but have huge profit-loss ratios...
I think you should also consider the average pip gain of each system in your calculations so you can set better stop loss rules.
over 3 years ago
Answers (2)
You question is a bit confusing because at the start your are "Assuming all of my signal providers trade with 100% accuracy "
In my opinion, that should never, ever be assumed.
But even if you are assuming that, then a margin call is the only acceptable drawdown that will fit that criteria because you are assuming the trade will go your way eventually.
In the explanation after the question, you imply that there will be losses. Kind of confusing since you were assuming 100% accuracy in the question...
over 3 years ago
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Thanks for your answers. The first answer is what I was looking for, but unfortunately not specific enough to actually help me. What I've now done is download my providers stats to Excel, divide max DD per trade by lots per trade to get max DD/lot for each trade. Then I sorted them from low to high and looked either for 1) a significant break - a point at which the max DD jumped significantly especially in terms of the resultant profit or 2) set a limit myself at 80% or 90% of the max DD if the slope is constant across the trades' max DD.
I was actualy trading for the last week or so with no s/l whatsoever and was up almost 300pips for the week. So I was in effect using the 'margin call' stop loss you suggest. Once I used the above method to set some stop losses I lost about 200pips of those earned in the previous weeks due to s/l's being executed. That's where I'm at today, trying to figure out if it was a 'blip' or not.
In answer to the second poster, my signal providers trade with hundreds of thousands or millions or dollars. I have a $1k micro account. At least some of the signal providers I have actually do themselves have 99% or 100% winning trades for a relatively long time 30+ consecutive weeks trading at least once per day 6 days a week. Will they have 100% after 52 weeks, 5 years, 10 years straight? Probably not, but I can adjust my s/l's too as the situation changes. Right now they are mid-term in experience and 100% (or some 99%) win. The problem is they can afford to go -1000 pips on a single trade before coming back up a week or two later with a +1 or +2 pip profit and close it out. If I followed that signal with even 1 microlot on my $1k micro account I'd lose it all or just about. That's my challenge. How to translate their winning signals to fit my account size limitations.
over 3 years ago
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