I wanted to write this article for some time, but in recent weeks with this "monkey business" platforms I just had some time to devote to anything but not this. The
issue of how to determine the initial capital to launch a system or set of systems is something on the one hand many brokers or companies that provide management services to customers recommended minimum capital in most cases is extremely low, there are even companies that appear to compete with each other to see who gets to offer their customers more for less money systems. Actually and unfortunately, some of these companies are more interested in the customers' money to generate commissions be monetized, and this is the root of most problems are caused by mismanagement in monetary management.
On the other side after searching and searching information in books and implementation of systems have not found any concrete way of determining the capital that is clear and convincing. In most cases the typical formula for calculating it is explained:
Initial Capital = Maximum Drawdown * (2 or 3) + guarantees
The main problem with this formula is the risk involved .
If we had a real operational Drawdown that will provide 2 times the maximum calculated Drawdown Back-testing this would nothing more and nothing less than a total loss of 50%! ( in the event that guarantees maximum is equal to Drawdown)
may well think that this situation is very difficult for you want, but you just have to shop around the net to see that there are dozens of systems qu and have multiplied X 2 and X 3 peak Drawdown in recent years.
If we operate with a set of systems the chances of this happening are increased even more, because systems, like that markets can go from having a negative correlation to positive quickly and that do two drawdowns that occurred at different points in simulation are given at the same moment in a situation real.
For these reasons I do not like this way of calculating the initial capital, so after giving a lot around the issue have come to a conclusion much more conservative calculation, that is:
Calculate what Drawdown will be the future, this will be the maximum Drawdown thrown in back-testing multiplied by 3, and this information must account for 25% of initial capital for just one example:
If I have a set of systems with a maximum Backtesting drawdown of € 5,000 in then: DD
future = 15,000 €
Initial Capital = 15,000 / 25% = 60,000 €.
In this way we ensure that even in an extreme case where we have a real Drawdown 3 times higher than in back-testing, it will not be a loss of more than 25% of the total capital and this would be an 8, 33% in back-testing.
In the case of decreasing the risk even further could reduce the% Max Drawdown will mean the future, the less risk as ever greater capital in icial and vice versa.
Finally I uploaded a screenshot that represents the different initial capital as a function of different percentages assumptions Drawdown for a maximum of 15,000 €
That's all for now, if anyone has come up here and have not fallen asleep or is drooling keyboard thank you very much! and over if you want to leave a message with your opinion a lot better still.
A greeting and good weekend!
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