Day Trading & Forex Forum

ikeano

hi all-
i hope you are all well- i am currently speaking with a us based trader who trades s and p eminis contracts,
i am considering having him manage an account on my behalf under a limited power of attorney contract on a pre agreed % age of profits basis,
i have been watching him trade a demo account for me for 2 months and have viewed an automated version of his trading on a backtested 2 year time frame. his success rate to date is fantastic -he gets 90 % of trades accurate consistently,however his losses are sometimes bigger than his gains -to date the max drawdown on the demo and backtested version was 20 %.but his returns over the 2 month period on the demo are in the region of 700 %.
he does not use margin.and s the account frows so too does the number of contracts traded-this is done on a pro rata basis.
my questions are really geared at eminis traders and i would be very grateful for your advice on money management and risk issues on this particular vehicle.,
1-
the traders normal wins are in the region of 2 to 3 points,he often takes less.sometimes even a tick(.25)
his losses are often only a tick but he has said that he sometimes sets stops 15 points away from his entry,and that this rarely gets hit-in the 2 months that i have witnessed it has not been hit as yet,however sometimes he thas taken losses in the region of 6,7 and 8 points.
my question is re money management-
what do you think that the largest number of contracts should be traded at a time on say a $50000 account?
he trades 10 contracts on a $50000 account ,
this means that if the 15 point stop is hit -the loss would be 10 *50*15 = $7500
-this is potentially 15 % of the account worth-
as i say this has not happened as yet and the max drawdown was in the region of 20 %-but i wonder what people think that the maximum number of contracts traded on that account size should be?
2-
my second question relates to the risks of trading the s and p eminis contracts specifically,
if we assume that the above scenario re number of contracts traded holds steady ,then if 10 contracts are traded on this account size,a drop of 100 points wipes out the acccount,a bigger drop means a call from the broker for funds,
my fear is that a catastrophic event such as a terrorist attack or some other such like may spark such a fall ,particularly if the trade is overnight,or even worse that the markets could albeit unlikely be suspended,rendering stop losses ineffective,
what are your thoughts on this?
what is the likelyhood of this happening and if such an event were to happen and for example the market gapped unfavourably,what other measure s if any could one take to minimise the downside?
3)
does any one know if an llc or some other such vehicle could be used to trade the account and thus limit liability in the event of a margin call?
4)
if a safety vehicle could be used -what arethe tax implications

i would be very grateful for all your comments=brian



iis u

Mathemagician

He sounds like what is known in the business as a "gunslinger" and gunslingers never last. Caveat emptor.

jj

ikeano

hi jj-
thanks for the reply-
what element of his strategy are you unimpressed with-is it the money management element?or somethhing else?
the reason for the post was to try and isolate potential chinks in the system and the money management is the one area that i am somewhat concerned about- i would appreiate you comments
brian

new_trader

Brian,

I am a conservative trader and I follow the rule: Number of contracts = (Capital/Initial margin)
Therefore I see nothing wrong with trading 10 ES contracts with $50,000 capital.

Although I can't dispute his claims I find it difficult to believe he can attain 90% success with an automated strategy. A proficient discretionary trader could probably do this consistently.

Taking 1 or 2 point profits and even 1 tick (0.25points) is acceptable for a discretionary trader with a high win rate provided they ALWAYS trade with a tight stop, around 2 points or less, 15 points is unthinkable!! Even 6 or 7 points...

__________________
"It always pays a man to be right at the right time."
-Jesse Livermore

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N.B: Most of my views, advice and opinions are based on short-term trading.
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mechanicaldaytrader

Let him trade one contract with a max drawdown of "x' dollars, regardless of how much you fund the account...he is using a "pivot" number for picking his entry, which is ok; just beware when he's wrong (should be a minimal amount of the time) he really gets slammed.

If the account is subtantially profitable at the end of the month, add one contract, with the same drawdown rule x2. Only if the account grows substantially and regularly should you increase the contract size.

Theoretically, you risk $1 to make $3 in the futures market. Since he might be using a pretty good pivot method an exception can be made, however, any string of losses would take you out of the game quickly, and also cast doubt on his paper traded account.

EDIT:
There are pivots in the e-mini market that occur in the AM and in the PM...knowing the pivot, and the time it was created in the past will clue the trader into knowing when to enter the limit order for that pivot to be hit and cause a reversal. If he's doing what I think he's doing, he's ok; occassional large losses is the only pain, with multiple contracts it can wipe out 2 weeks of profits. That's why I would exercise very tight money management at all times.


Good luck!

MechanicalDayTrader

ikeano

hi new trader-
thanks for taking the time to repIy.
i think the 90 % is a guide as to the systems accuracy if traded manaIIy,but i am not sure about that,
i know from his records that he has been about 85 %-this is on day trades-he said 90 % was the record on the night system,
wouId an automated system have a much Iower rate in your opinion?
he has traded taking 2 ,3 and 4 point Iosses over rhe past 2-3 months since i have started to foIIow his trading-
it has never gone to 15-this was the maximum he said that he wouId use but it is very rare that he does-the reasoning fotr 15 points -i am not so sure-as i said earIier i need to go over to meet with hima nd pose aII these queries-
thanks again for trhe comments-brian

ikeano

hi mechanicaI
many thanks for your repIy.
i know he does use pivot numbers but this is not what the system is based on-
it is he says based on a technicaI indicator over 2 different timeframes-
if both say samething at the same time its a go-if not it isnt,
i think he uses pivots in conjunction with these for added confirmation and gaining better entries but im not sure exactIy - i do know that he uses pivots seperateIy when trading options which is a seperate starategy.
i dont understand your comment about risking $1 to make 3 in the futures market-
can you expand on that pIease-
thanks again for your time-be good-brian

mechanicaldaytrader

Pivots relate to "price" of the expected reversal; Traders would probably use multiple time frames (cycle analysis) and one or mroe technical indicators to evaluate where the market is in relationship to the "pivot" (price).

Technical Trading frequently involves time & price + a comparison with of a "fast chart" and a "slow chart" -- institutional traders typically have large stops and limits nested at pivot points to either 'enter the market' or 'unwind existing positions - take profits'.

Even if the market is in a downtrend, the market may hit a major pivot # where there are a large quantity of contracts - a daytrader can enter long when that pivot is hit and grab a quick profit and exit (or typically reverse) before the market resumes it's downward spiral. In the Dow, that movement is typically about 14 points from top to bottom of this cycle.

One just happened a few minutes ago in the Dow - I unwound half of my contracts at 11275 - the pivot was hit at about 3:30 pm ET - the market zoomed up about 17 points reversed and created a lower low. I am now flat, exiting the rest of my contracts just before 3:45 pm ET at the new Low for the afternoon. Done for the day. The pivot was known for a few hours near 11274 - many traders entered Long at that number and will attempt to hold overnight and make a profit maybe tommorrow.

Generally, if you seek advice on trading futures, the rule of thumb is, risk $1 to make $3. So, if you are trading the Mini Dow, and your goal is to make a minimum of 15 points, only risk 5 points on the stop loss. If you risk $1 to make a $1, you'll go broke fast!!

Keeping your risk at the 1:3 ratio, you can win 33% of the time and still break even (not counting commissions). Assuming some of your wins exceed your minimum profit objective of 15 points, and your win/loss ratio is maybe 45%, your profit can be substantial.

Disciplined profit objectives and disciplined stop losses preserve your account from massive drawdowns and bad attitudes towards trading.

Thanks for your questions, hope this helps, any other questions, don't hesitate to ask.

Good Trading !

Mechanical Day Trader