Originally posted by Thanky
Cheers for explaining. Sounds like your system is then a 5 to 10% system? Or perhaps higher but you're tempering expectations?
Interested to see how leverage affects back tests when we get to that. Any decent draw down may lead to ruin?
Actually Thanky the leverage won't have any affect at all on drawdown. I won't be using leverage to increase the risk per trade. Most people don't understand this and believe that CFDs are highly risky instruments. But if you use the leverage in a smart way all you do is increase the number of trades you can open and close given your limited capital, and hence as per the mathematical "law of big numbers" you have a greater chance of realising your systems statistical edge.
An example of a recent long trade my system could have taken is CBA with a trade opened at the open on 28/12 with a 1*ATR profit target and the equivalent -1*ATR protective stop. The trade open level minus the stop level is the risk on the trade. If I only want to risk say $500 on the trade then this defines the position size for me and also the profit I expect from a successful trade. I have a spreadsheet that I use to do all these calcs. In summary for the trade shown on the chart below the:
Capital at Risk = $500
Buy Price = 7049c
Buy Date = 27/12/2018 i.e the setup occurred the day before on 26/12/2018
Initial Protective Stop Price = 6824c
Sell Price = 7191c
Sell Date = 31/12/2018
Position Size = 444 shares
Equivalent Capital = $31,329
Margin at 5% = $1,566
Net profit after Commission and Interest = $551.92
So a good two day trade that risked $500 and returned $552 or around 30% on margin.
I could have made the same trade just buying shares but it would have required $31k of my trading capital. Notice that the risk is exactly the same whether I use CFDs (leverage) or not. There are other system related issues that do make this type of trading a bit more risky, but I'll leave these considerations for another day.
Notice on the chart that the trailing protective stop, the thick black line on the price chart did in fact reduce the risk to almost break-even by the time the trade would have been closed. I'll be using the Amibroker optimizer to help determine the appropriate system ATR multiples for the stop and profit levels when I get to the stage of portfolio backtesting. There's lots more to talk about with this type of system, but I think this is enough for now. If you have any question just let me know.
(20min delay)