(Continued from April 28th 2015)

Yesterday we went over the first 3 of the 6 key variables to trading, a CTA or Money Manager knows that you may not, and as promised here are the last 3 Variables.  To recap the first 3 were (and to read the full descriptions I will include the previous articles link at the bottom of this post):

  1. Knowing the reliability, or what percentage of the time your trades make money.
  2. How big your portfolio (risk capital), is compared with your losses (when traded at the smallest possible increment (ex: one futures contract).
  3. The cost of making a trade.


Now onto #4, 5, and, #6…

#4.  How often you have the opportunity to trade. Taking into consideration #’s 1 through #3 above, let’s say the combined result of them is that you made 20 cents per dollar you put at risk. If you made 100 trades, risking $100 on each, you would wind up with a total profit of $2000 (before fees & commissions – slippage is accounted for). Now envision that your methodology or system makes 100 trades per day.  If you do the math, obviously you would be pulling in a profit of $2000 a day (again before fees & commissions), but now compare that with a system or methodology that only makes 100 trades per year – you would make that same $2000 but it would take the entire year to do this.  “Opportunity factor” is a key variable and clearly can make a big difference in performance.

#5.  The size of your trading account or risk capital.   The ramifications of the first four variables on your overall account balance depend decidedly upon the size of your account or risk capital.  Example, even the “cost of trading” (fees & commissions) will have a dramatic effect on a $2000 account.  If it costs $50 to trade, then you will take a 2.5% whack on each trade before you make a profit.  Although commissions and trading costs have dramatically decreased over the years you still need to calculate the impact of this variable on your trading account. In this example you would have to average more than 2.5 % profit per trade just to cover the cost of trading.  On the flip side, the blow of the same $50 in trading costs (fees & commissions) becomes insignificant if you have a two million dollar account.

#6.  Your Position Size or how many contracts you take on at one time (ex: 1 contract versus 1000 contracts). Undoubtedly, the amount you profit or lose per contract is multiplied by the number of contracts traded.

Different trades will probably have separate risk levels, or different R’s (Expectation – going back to yesterday’s article).  Therefore, a 1-R loss will never be the same for trade X as it will be for trade Y.  Your thought may be “What good is the measurement of R if it can vary all over the place?”  The beauty of using R shows itself through “position sizing”.  To specify, if you risk a constant percentage of your equity, let’s say 1%, then you will be equalizing each 1-R risk. If you have $100,000, then you would only take a $1,000 risk or 1% on each position.  The key is to equalize your risk on a per trade basis.

These are the 4 of the 6 remaining key variables a CTA or professional money manager knows and focuses on that you may not.  If you have any questions please feel free to get in touch with us through our website at:  www.iasg.com , you can email me direct at info@iasg.com, or feel free to call anytime:  312-561-3145.  Follow us on Twitter:  @iasgcta