Money Management for accounts over $100,000
The term “Money Management” can be confusing to some. It actually deals with Position Sizing. The Pegasus 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.
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.
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.
setting. This means that trades whose risk exceeds $3000 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”.
profits came out to about $1.3 Million. Suppose we have $200,000 available to trade Pegasus with. If we add the starting account equity of
$200,000 this means that we grew our account from $200,000 to just over $1.5 Million. Over a 33 year period we would have multiplied our
initial capital almost 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?
HYPOTHETICAL HISTORICAL PERFORMANCE
As you can see from the file, when applying position sizing we grew our $200,000 account to the realm of $15 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.
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
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 $15 Billion on a starting
account size of $200,000 is just not going to happen - impossible. Donald Trump will still continue to be richer than you!
position sizing, money management strategies to grow your account profits exponentially.
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.
HYPOTHETICAL HISTORICAL PERFORMANCE
As can be seen from the chart above, this time the total profits ended up at almost $90 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.
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.
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 Pegasus 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.
C:\Pegasus\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, Pegasus 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.
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.
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.
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.
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.
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 "Pegasus Portfolios &
Download free information pack on our systems. See “Download Manuals” on this website.
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.
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.
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.
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
PAST PERFORMANCE IS NOT NECESSARILY INDICATIVE OF FUTURE RESULTS
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