"Minimum Required Capital" method, an alternative perspective of risk.

For smaller traders looking to make large returns, survival is the name of the game. The idea of only risking 2% of your equity per trade on a 10 or 20 thousand dollar account isn’t very practical. We therefore offer a far more aggressive thoroughly researched strategy. We call this the MRE approach (Minimum Required Equity).  As you will see, the MRE approach can offer a statistically researched way to maximize smaller account survival while aiming for returns in excess of 100%. Let us again caution, this is far different than the more conservative approach of risking a small percentage per trade of a larger account.

In order to understand the MRE approach it is important to understand the 2 different types of drawdowns that can occur in an account. One type is the maximum drawdown, this is the one most people are familiar with. If an account goes from 100k to 200k and then back to 100k that would represent a 50% drawdown. However, if the lowest that 100k account ever got was 90k then the “START TRADE” drawdown was only 10%.  This approach assumes you only take new trades going forward as opposed to entering the currently open trades when you start trading a system.

In order to effectively evaluate a realistic MRE amount we conduct a “worst case analysis”. For example, assume that over a 20 year period a system had 2000 trades.  What the worst case analysis does is to re-test the system 2000 times, each time starting from a new different trade. This allows us to see how much the start trade drawdown would have been had we started at the worst possible time. It then adds how much margin was required* to maintain the open positions during this period. This shows the minimum capital that would have been required to trade the system from that starting date. It also shows what the next 12 month performance from that starting date was. You now have over 2000 test results showing you the minimum capital needed and the subsequent 12 month profits or losses. We then run a frequency distribution to see what the best and worst and average results were.

In the case of one of our systems, Checkmate, the average capital required to trade a 20 market portfolio was only $10,353 (assuming the proper risk filter). The average first year gain was $16,729. Therefore the average result was an approximate 160% gain the first year! You can also see that had you started on the worst possible date you needed $19,754 to trade the account. If you started with that amount that still represent an average first year return of 85%!

Click here to download the Excel spreadsheet showing the results.

♫Click here for a video explanation

*Based on estimated margin. Margin requirements can and do change.