From the April 01, 2012 issue of Futures Magazine • Subscribe!

How much trading capital is enough?

Worst-case scenario

To evaluate a series of losses, we need to construct a random series of trades. To do this, we’ll use Microsoft Excel’s random number function to assign a random number to a cell. Adjacent to this cell, we enter the following statement: “if (RC1<0.5,0,1).” If the number is 0, we assume the trade was a loser. If the number is 1, we assume the trade was a winner (see “Random results,” below).

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We then copy these values down 100 rows. We repeat the sequence in the second and third columns. This provides three hypothetical trade results representing three hypothetical markets.

Each time we recalculate the spreadsheet, we get a new sequence of winners and losers. We recalculate the rows 10 times to generate 1,000 trades for each market.

The results are as expected. In the first column, the random number function generated 502 losers out of 1,000 trades. In column two, the random number function generated 484 losers. In column three, the random number function generated 499 losers.

The next step is to determine the longest string of losing trades from any of the three columns. The longest out of all this data was eight losing trades in a row. Operating on the assumption that this is a worst-case scenario, we can determine how much money we need to weather this potential storm.

The dollar value depends on the market we’re trading. If we are trading the U.S. Dollar Index, we need about $2,000 in margin to initiate a trade. If we assume we are going to make the margin amount on our winners and lose half that on our losers, we would need $8,000 plus the initial margin. This would require a total of $10,000 to trade just one contract.

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