[dpaterso]

Good (Sunday) morning everyone!!!

'I had a dream' (last night) about our money management rules and how they should be carefully adjusted according to the instrument being traded!!!

Let me explain (this follows on from my previous post where I mentioned to be very careful when using our money management rules 'as they stand' on certain instruments):

Right now the margin cost of a full lot (10 000 units) of EUR/USD at Delta is about $68. Using our money management rules (let's say you're using the 'original rules' i.e. 1.875% of total capital as the maximum margin cost per position) you'd need about $3627 of total capital to take this trade.

(I'm using EUR/USD as a 'standard' or 'baseline').

Now the 14 day ATR for EUR/USD currently 0.0253 or $253 (rounded up).

Dividing our total capital requirement of $3627 by $253 gives me a 'factor' of 14 let's say.

So I'm saying now that you need at least $3627 total capital to trade one full lot of EUR/USD which is a margin cost of $68, you're getting $1 per pip movement, and the current expected $ range is $253 per day. Agreed???

Now I need to 'equate' this to GCI so:

At GCI the same EUR/USD trade would cost you $25 in margin. However: the same trade on the Bovespa Index would ALSO only cost you $25 in margin so using the 1.875% rule is useless here.

HERE is the difference though:

The Bovespa's 14 day ATR is currently 3915 and the $ value per point movement is $0.50. This gives you a daily ATR in $ of $1958 (rounded up)!!!

So using the 'factor' of 14 that I arrived at above:

You need a minimum of $27412 (14 x $1958) of capital to 'run the same risk' trading the Bovespa Index as the 'risk you are running' trading EUR/USD!!!

Does that make sense to any of you??? Can you think of another way of calculating this??? If so then please let me know.

Here is another example:

The Dow (Futures) Index currently has an ATR at GCI of 686 and the $ value per point movement is $1. This gives you a daily ATR in $ of $686.

So again using the 'factor' of 14 that I arrived at initially:

You need a minimum of $9604 (14 x $686) of capital to 'run the same risk' trading the Dow (Futures) Index as the 'risk you are running' trading EUR/USD!!!

Make sense???

Whichever way you do it though: it's GLARINGLY obvious that you MUST take into account the $ value per pip / point movment as well as the expected 'range' of an instrument into account at GCI (because the lot sizes are 'fixed') before making any trading decisions on a particular instrument (and I'll be totally honest with you: JUST from THOSE calculations I should STILL not be trading the Bovespa Index)!!!

Now whether or not using the 14 day ATR is the correct way I'm not sure. Maybe to be 'on the safe side' you would take the MAXIMUM movement ('range') in a week for the past 52 weeks or the MAXIMUM movement ('range') in a day for the past 365 days or something like that (which, of course, would dictate that you need quite a bit more capital but, of course, you'd be 'safer')!!!

The point really is this though: can you see just how easy it is to be 'sucked in' to trading an instrument that EVEN ALTHOUGH the margin requirement is minimal and is APPARANTELY NOT violating your money managent rules you should not even be LOOKING AT trading that particular instrument with a given amount of capital in your account!!!

Thoughts welcome!!!

Regards,

Dale (forexbrokersonline.net).

Edit:

Now strangely enough (maybe not so strange I suppose): using the same 'logic' above BUT taking the values from the 1 hour charts (for example) you COULD argue that given the same amount of capital BUT trading off of the 1 hour charts increases your 'ability' to trade certain instruments that you would not normally be 'allowed' to trade using the daily charts. In other words: the 14 HOUR ATR in $ is a lot less for EUR/USD and the Bovespa Index than the 14 DAY ATR in $ for both instruments. Just a thought. Of course: the likelihood of 'whipsaws' increases exponentially with the shorter timeframe so this you also have to somehow 'factor in' I'd imagine.