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    Andromeda Position Sizing Strategies

    Money Management for accounts over $100,000

    The term “Money Management” can be confusing to some. It actually deals with Position Sizing. The Andromeda system will tell you the
    “when”, i.e. when to buy, when to sell, when to enter, when to exit. It will even compute and tell you the estimated risk per trade which you
    will use for Position Sizing purposes. That is automatically handled for you by the system. This section, however, deals with the “how
    much”, i.e. how many contracts to trade. So far we have been showing sample portfolios all based on single contracts per trade. If you are
    trading a large size account (over $100,000), you should implement a Position Sizing strategy (Money Management strategy) to begin to
    trade multiple contracts per trade. This will grow your account exponentially instead of linearly.

    To better understand this lets begin with the following easy to follow example. Suppose you manage to invest $10,000 at 30% simple
    interest per year over 20 years. You will hence receive $3000 per year (30% of 10,000). After 20 years your account is now at $70,000
    (60,000 accumulated in simple interest plus the original investment of 10,000). So you have gone from $10K to $70K – you have grown
    your account 7 fold. Not bad. This is the equivalent of trading single contracts. If you think this is good you are missing the boat.

    Now suppose you invest the same $10,000 at the same 30% for the same 20 year but now you compound your returns instead. This
    means that as your account grows you will re-invest the profits. After the same 20 years you will end up with $1.9 Million! You have grown
    your account 190 fold! This is not magic – its mathematics. You invested the exact same startup capital in the exact same investment over
    the exact same time period. The difference here is that you compounded your returns. The difference in results is dramatic. Furthermore,
    you did not increase your risk in any way. You had your money in the same place and invested it in the same investment. What changed
    here was only the “how much” you invested every year. This is the equivalent of trading with Position Sizing.

    So now lets look at an example using Andromeda.

    You will still continue to limit your risk to $4000 based on a single contract per trade. This is the default value for the Initial Risk Limit
    setting. This means that trades whose risk exceeds $4000 on a per contract basis will be by-passed. Even if you have $10 Million you
    should still adopt this risk control measure since it will keep you out of those trades that carry a disproportionate high risk. Those trades
    are known as “high risk outliers”.

    Using the Andromeda Large Size 22 market portfolio previously presented on this website, recall from our single contract example that our
    net profits came out to about $1.4 Million. Suppose we have $200,000 available to trade Andromeda with. If we add the starting account
    equity of $200,000 this means that we grew our account from $200,000 to just over $1.6 Million. Over a 33 year period we would have
    multiplied our initial capital eight-fold. Not bad, but we are truly limiting ourselves! While this is fine for single contracts, what would the
    returns be if we applied position sizing (money management) to trade multiple contracts, and thus compound our returns and grow our
    equity exponentially instead of linearly?

    First Position Sizing Example:

  • tested Jan 1’st 1980 – Jan 1'st 2013. (33 years)
  • same as Andromeda's Large 22 market portfolio
  • $200,000 starting account size
  • risking 2% per trade
  • number of contracts is determined by the equity risked
  • $100 deducted per trade per contract

                                                                          HYPOTHETICAL HISTORICAL PERFORMANCE




























    As you can see from the file, when applying position sizing we grew our $200,000 account to the realm of $200+ Billion! Yes, that is not a
    misprint - it is a B for Billions. Again, this is not magic – its mathematics, however totally unrealistic as will soon be explained. So for
    illustration purposes bear with us for a moment. We applied the exact same system under the exact same conditions; the only difference is
    that we now applied a Position Sizing technique to grow the account exponentially. Notice how the single contract file grows in a linear
    (constant) manner while the multiple contract scenario grows in an exponential (compounded) manner. Furthermore we began in 1980 but
    the increase in the first 15 years is so minute (only in the millions) compared to the billions that it explodes into afterwards that you hardly
    see the equity growing at the start of the chart.

    And what about risk? Was it increased? Actually we reduced it! All along, we never risked more than 2% of our entire equity on any trade.
    In contrast if your account is at $20,000 and you take a trade whose risk is $2000 that’s a 10% risk. Unfortunately you have no choice but
    to trade it since the minimum contract size you can trade is 1 contract. At the $200K level, risking 2% you would trade 2 contracts since 2%
    of $200K is $4000 and the risk of this particular trade came in at $2000. Hence comparatively speaking, you are trading twice as much as
    the small account, yet risking only 2% of your capital while the small trader is risking 10% (5 times more risk for half the potential profits!).
    This shows you how larger traders always have a huge advantage over small ones. Like it or not that's just a fact of reality, and this
    example proves it mathematically. The larger your account, not only the more can you diversify and begin to trade different markets, even
    different systems on different time frames, etc, but you can employ position sizing techniques that are simply not feasible for small
    accounts.

    Problem with this first example:

    Going back to our $200 Billion profits.... sounds amazing doesn't it? You may be wondering if this is truly possible. The answer is NO! The
    reason is that at that level of the equity curve you are "in theory" trading MILLIONS of contracts per trade/signal. In the real world this is
    simply not possible. The Futures markets are big, but not that big! So sorry to pop your balloon here but profits of $200+ Billion on a
    starting account size of $200,000 is just not going to happen - impossible. Bill Gates and Warren Buffet will still continue to be richer than
    you!

    The reason why this example is shown is to illustrate the power of compounding, by applying simple, sensible and conservative risk,
    position sizing, money management strategies to grow your account profits exponentially.

    So to bring us back down to "reality", following is another example with the difference that a cap of a maximum of 100 contracts is placed,
    hence once you hit 100 contracts per trade that is as far as you go and the number of contracts traded per trade stops growing.

    Second Position Sizing Example:

  • tested Jan 1’st 1980 – Jan 1'st 2013. (33 years)
  • same as Andromeda's Large 22 market portfolio
  • $200,000 starting account size
  • risking 2% per trade
  • number of contracts is determined by the equity risked, but capped at a maximum of 100 contracts per trade
  • $100 deducted per trade per contract

                                                                     HYPOTHETICAL HISTORICAL PERFORMANCE                         
                                               



























    As can be seen from the chart above, this time the total profits ended up almost $110 Million (that is with an M for Millions and not a B for
    Billions). Still not bad at all, and this is more acceptable since we are capping the maximum number of contracts traded at 100, otherwise,
    like the equity itself, the number of contracts will continue to grow and grow exponentially into unrealistic figures.

    Please note that in this example it assumes that the trader would have started with $200,000 back in 1980 and stuck with the system for
    over 33 years, never making any withdrawal from the account. This is highly unlikely as well since routine withdrawals would significantly
    impact this performance, but the whole point of this illustration is to show the power of compounding your returns by applying position
    sizing, money management strategies like Fixed Fractional Trading, such as the one that was applied in this example.

    Fixed Fractional Trading

    In our above examples we employed a popular Position Sizing (Money Management) methodology known as Fixed Fractional Trading.
    Here is how it works. Suppose you have a half a million dollars in your account and you are applying a fixed fraction of 2%. This means
    that you will risk $10,000 on your next trade (2% of $500,000). When the next trading signal is generated, suppose Andromeda reports a
    risk per trade per contract of $2500. That means that you will trade 4 contracts ($10,000 divided by $2500). If you get a decimal you will
    always round down to the nearest whole number. If the risk per trade was $2550 instead and you got 3.9 contracts (10,000 divided by
    2550) that means you would trade 3 contract and not 4. This way your estimated risk never exceeds 2%. However, you would always trade
    at least 1 contract. So if you get 0.8 contracts you will go ahead and trade 1. This is the only exception since you would not round down to
    zero. Otherwise you will always round down to the nearest whole number.

    IMPORTANT: For TradeStation users: to see the risk per trade per contract please open up the Andromeda Risk .csv files located in your
    C:\Andromeda\Risk folder. Please read the “Trading & TradeStation Manual” for further instructions on this. You will need the information
    contained in these files to determine how many contracts to trade. These files will tell you the estimated risk per trade. Whenever a new
    trading signal is generated, Andromeda calculates the initial estimated risk based on one contract. It then prints out a report as a csv file
    (comma separated values) that you can open up with any spreadsheet program like Microsoft Excel or Lotus 1-2-3. You will then plug in
    the corresponding risk per trade into the Fixed Fractional Trading equation explained above to compute how many contract to trade.

    A strategy like Fixed Fractional Trading has several advantages:

  • Grows your account exponentially (like compound interest instead of simple interest)
  • Keeps your proportional risk constant (always X% of your equity)
  • Spreads the risk evenly among all markets in your portfolio and keeps your portfolio “balanced”

    The last bullet means that for example your risk allocated to Corn will be the same as that to Natural Gas. Obviously a Natural Gas
    contract is much larger and thus will impact both your profits and loses much more than a Corn contract. If you are trading single contracts
    then your portfolio will be unevenly balanced. With Fixed Fractional Position Sizing you balance things out since you are trading more
    contracts for Corn relative to Natural Gas.

    Position Sizing strategies like the one we have illustrated here are not practical for small accounts. This is because you simply don’t have
    enough money to begin to trade multiple contracts. Even if you were to apply Position Sizing formulas you would end up trading single
    contracts most of the time anyways until you enter the realm of 6 figures (above $100,000). Then you can begin to grow your account
    exponentially instead of linearly.

    Please Note: our fixed fractional position sizing example also makes the following 2 assumptions:

  • You will always re-invest your profits, i.e. never withdraw funds from the account
  • The markets will always have sufficient liquidity to trade the number of contracts you need to trade

    In the real world neither one of these assumptions will probably hold true. As for the first assumption, you will probably withdraw funds
    eventually, if not to enjoy your profits you will do so to pay the high taxes to the government as a consequence of your huge profits. As for
    the second assumption, situations may arise where in some of the smaller markets you might face difficulty getting filled with 100 contracts
    all at once on a single order. The point, however, is to demonstrate that you will nevertheless grow your account much faster by applying a
    Position Sizing approach to trade multiple contracts.

    Fixed Fractional trading is one of the most popular of position sizing (money management) strategies out there. It is purely mathematical,
    totally mechanical and objective, and best of all simple. It is not based on any hindsight of any type. There are many other position sizing
    strategies out there. We have only presented one simple example here. Some can get quite creative. Some are based on hindsight like
    Optimal F. Others are not like Fixed Fractional Trading. There are other popular ones like Fixed Ratio Trading. In fact, there can be as
    many possible position sizing approaches and variations as there are trading systems. That, however, is beyond the scope of this manual.
    We just wanted to show the power of compounding when applied to the Futures markets. And best of all while actually reducing your risk.

    Few markets provide the opportunities for exponential growth like the Futures Markets. This is due to the ever present high leverage. In
    the stock market it is far more difficult to pile on more shares of the same stocks as your account increases since the price of the stocks
    have also increased. In Futures, however, the margin requirements tend to be more constant. Yes, exchanges do adjust and modify
    margins from time to time, especially in times of high volatility and yes companies do announce stock splits too which would increase your
    shares. But in general the leverage in futures will always be higher than in stocks, allowing a competent trader to exploit these powerful
    Position Sizing techniques very effectively.

    For a detailed explanation on Position Sizing techniques such as the one presented here, please see the manual "Andromeda
    Portfolios & Performance".

    Download free information pack on our systems. See “Download Manuals” on this website.


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    Disclosures & Disclaimers:

    FUTURES TRADING IS NOT SUITABLE FOR EVERYONE AND PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE
    RESULTS. THERE IS RISK OF SUBSTANTIAL LOSS IN FUTURES TRADING OR WITH ANY TRADING SYSTEM OR PROGRAM. CAREFUL
    EVALUATION OF YOUR PERSONAL FINANCIAL SITUATION MUST BE DONE PRIOR TO DECIDING TO TRADE IN THE FUTURES
    MARKETS OR ANY GIVEN TRADING SYSTEM OR METHODOLOGY.

    Please Note: All performance figures and illustrations were obtained using historical back testing on a computer and are not the results of
    an actual account. No guarantee is inferred that future performance will be like the results shown. Futures trading involves risk. There is a
    risk of loss in Commodity Futures trading.

    U.S. Government Required Disclaimer - Commodity Futures Trading Commission Futures trading has large potential rewards, but also
    large potential risk. You must be aware of the risks and be willing to accept them in order to invest in the futures markets. Don't trade with
    money you can't afford to lose. This is neither a solicitation nor an offer to Buy/Sell futures. No representation is being made that any
    account will or is likely to achieve profits or losses similar to those discussed on this web site. The past performance of any trading system
    or methodology is not necessarily indicative of future results.

      CFTC REQUIRED RISK DISCLOSURE STATEMENT:

    NOTICE: "HYPOTHETICAL PERFORMANCE RESULTS HAVE MANY INHERENT LIMITATIONS, SOME OF WHICH ARE DESCRIBED
    BELOW. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR
    TO THOSE SHOWN. IN FACT, THERE ARE FREQUENTLY SHARP DIFFERENCES BETWEEN HYPOTHETICAL PERFORMANCE
    RESULTS AND THE ACTUAL RESULTS SUBSEQUENTLY ACHIEVED BY ANY PARTICULAR TRADING PROGRAM.

    ONE OF THE LIMITATIONS OF HYPOTHETICAL PERFORMANCE RESULTS IS THAT THEY ARE GENERALLY PREPARED WITH THE
    BENEFIT OF HINDSIGHT. IN ADDITION, HYPOTHETICAL TRADING DOES NOT INVOLVE FINANCIAL RISK, AND NO HYPOTHETICAL
    TRADING RECORD CAN COMPLETELY ACCOUNT FOR THE IMPACT OF FINANCIAL RISK IN ACTUAL TRADING. FOR EXAMPLE, THE
    ABILITY TO WITHSTAND LOSSES OR TO ADHERE TO A PARTICULAR TRADING PROGRAM IN SPITE OF TRADING LOSSES ARE
    MATERIAL POINTS WHICH CAN ALSO ADVERSELY AFFECT ACTUAL TRADING RESULTS. THERE ARE NUMEROUS OTHER FACTORS
    RELATED TO THE MARKETS IN GENERAL OR TO THE IMPLEMENTATION OF ANY SPECIFIC TRADING PROGRAM WHICH CANNOT BE
    FULLY ACCOUNTED FOR IN THE PREPARATION OF HYPOTHETICAL PERFORMANCE RESULTS AND ALL OF WHICH CAN
    ADVERSELY AFFECT ACTUAL TRADING RESULTS

    FUTURES TRADING INVOLVES RISK. THERE IS A RISK OF LOSS IN FUTURES TRADING

    PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS

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