Notes on my test of the Captgrumpy Strategy.
In my description of this test, I have indicated that my watch-list includes 30 currency pairs, and that all positions taken are the same size. And I have reported the P/L (realized and unrealized) achieved in this test in terms of pips, but not dollars.
This test involves a portfolio of positions. Potentially, up to 30 trades (the entire watch-list) could be open at one time. This portfolio methodology is one that many readers of this thread may be unfamiliar with. So, I think it would be a good idea to detail (1) the metrics of the Oanda demo account I am using, (2) the metrics of the individual trades taken, and (3) the metrics of the overall portfolio.
The Oanda demo account came loaded with an initial balance of $100,000 (play-money dollars) -- a ridiculously large balance for most retail traders to "play" with. I have chosen to trade this demo account as if it had an initial balance of $2,000. And I have decided that the position size for each trade will be 1,000 units of base currency. (Other brokers would refer to this size as a micro-lot. But, Oanda offers trading in units of currency, and doesn't even use the lot or fractional-lot terminology.)
Here are the overall metrics for this test:
A maximum of 30 positions could be open simultaneously, with a combined notional value of roughly $30,000. This is 15 times the assumed $2,000 balance in the account, so that actual leverage used in this test could be as much as 15:1. Currently, with 21 positions open, totaling $21,588 in combined notional value, 10.8:1 actual leverage is being used.
Average used margin across the various pairs in the portfolio has tracked steadily at between 3% and 4%, corresponding to average maximum allowable leverage between 25:1 and 33:1. At present (Thursday, December 7), for example, the Oanda platform shows used margin as $812 -- which is 3.8% of the $21,588 combined notional value of 21 positions. If 30 positions were open simultaneously, used margin would be approximately $1,200.
For each of the seven USD/major pairs, and each of the 21 major crosses in my watch-list, I am using a fixed 300-pip catastrophic stop-loss. For the two USD/minor pairs much wider stops are needed. For the USD/CNH (dollar/yuan), I am using a 2,000 pip stop-loss; and for the USD/MXN (dollar/peso), I am using a 6,000-pip stop-loss.
In a subsequent post (later this week, or this weekend), I will detail how I determined those catastrophic stop-loss levels.
It can't be over-emphasized that catastrophic stop-losses are intended to rescue a portion of the account in the event of a black-swan event (such as the SNB debacle in January 2015) -- not to provide protection against weekly or monthly price fluctuations, nor to function in any way as part of normal position closing. In this strategy, positions are closed (or reversed) based on once-daily, active trade management. Positions are not closed (or reversed) based on triggered stop-losses.
If all 30 potential positions were open at the same time, the implied risk appears, at first glance, to be $812.27 based on the fixed stop-losses listed above. See the table at the end of this post for details on how that figure was determined.
That implied risk assumes that all 30 open positions get stopped-out simultaneously. We know intuitively that such an occurrence is highly unlikely, and it turns out that it can be proven mathematically that the actual risk in a portfolio such as this one is far less than the implied risk calculated in the table.
For proof of this, I will refer you to a thread titled The Forex Portfolio - How to Gain Consistent Profits by Staying in the Market 24/7. That thread was started by Shawn Cannon almost 5 years ago, and it ran for about 3½ years. Shawn was active in this forum for many years, posting under the username mastergunner99.
The question of how to calculate risk in a portfolio of positions came up in mastergunner's thread, and I decided to tackle that question back in 2013. The math got pretty hairy, but -- if you want to wade through it -- you can read about it HERE.
If 30 positions were to be stopped out simultaneously, based on the extraordinarily large stop-loss levels listed above, total losses in this test account would be $812.27 as noted above.
At the time of total portfolio stop-out, equity in the account would be $2,000 - $812.27 = $1,187.73 (ignoring all P/L booked to the account in the interim). Immediately after total portfolio stop-out, that equity figure would become the remaining account balance. There would be no open positions.
59% of the initial $2,000 balance in this test account would have survived.
At no point in this scenario would forced liquidation (a margin call) be a factor in the metrics of this account. Prior to stop-out, maintenance margin on the (hypothetical) 30 positions in this account would be 50% of initial required margin. That is, maintenance margin would be approximately $600. The lowest level of equity in the account prior to stop-out would be $1,187.73, well above the maintenance margin requirement.
Therefore, even in this absolute worst case scenario, no forced liquidation would occur.
Given these facts: (1) maximum, initial, required margin = $1,200 and (2) maximum real risk is well below the $812.27 implied risk (noted above), we can say that the $2,000 account balance assumed in this test is adequate to support this portfolio of trades.
From this we can extrapolate any number of account balance and position size combinations. Specifically, this test could be scaled up, or scaled down, to run in any size account, by adjusting position sizes accordingly. And, in an Oanda account, position sizes are infinitely adjustable. Here are a few examples:
How implied risk is determined.
Risk is defined here as the total of all the dollar-losses resulting from 30 stop-outs. Those dollar-losses are determined by (1) the pip-value of each pair, (2) the stop-loss for each pair, and (3) position sizes (1,000 units in each case).
The following table shows how these metrics combine to yield total implied risk -- that is, the total loss which 30 stop-outs would produce, if such an event ever occurred.
Explanation of the figures in the table (using the yen-pairs as an example):
There are 7 yen-pairs in the portfolio, each having the form XXX/JPY. Any pair of the form XXX/JPY currently has a pip value of $0.0884 per pip per micro-lot (1,000 units).
$0.0884 per pip x 300 pips = $26.52 risk per yen-pair
$26.52 x 7 yen-pairs = $185.64 combined risk if all 7 yen-pairs hit their 300-pip stops simultaneously.