Humans trade differently

The connection between GSystem trader program and Web server was down last night, so the signals and positions were not updated till 11AM Eastern Time today. This did not impact the signal delivery to the subscribers, only the Web pages were not updated in real-time.

The trading was suspended till tomorrow, there are no open position at the time.

How GSystem determines the position size when it enters a new trade?

It’s a simple but effective enough formula and it prevents a system from pyramiding and it does not trade the same percentage of the trading capital each time.

What’s wrong with pyramiding? You all know that it is too good to be true. The pyramiding system increases (or even  doubles) the position size after each loss. Theoretically, it should bring the account to it’s original balance (or even to the profit) on the eventual winning trade. But the down side of this strategy is that if your loosing streak continues you risk to loose everything on the next trade. So such a strategy wasn’t even considered to be a part of GSystem.

The plain percentage trading is also not so good as it may seem. For example, if some system trades 5% of the capital on each trade and this system hits a wiining streak. As it gains some money on each win it trades more on the next trade (because the capital increases) and when it meets an eventual loss, it looses everything (or almost everything) it gained for several winning trades. At the other hand, if the loosing streak continues then it trades less each time and it becomes very hard to even return to the original level because even in a case of a winning trade the profit is smaller.

Here’s how GSystem operates:

When the signal to trade occurs, the system first checks up how much Funds Available is at the account.

Funds Available (FA) = Account Balance + Open Equity – Used Margin.

Let’s say that our FA is $20,000.

The system is configured to have no more than 2 simultaneous open positions, so the FA value is divided by 2:

FA = FA /2.

In our example, FA = $10,000 now.

Now we calculate how much lots we can take with this value of FA. To do that, first we need to know how much margin is required for one lot and how much money might be lost on each lot in a case of a stop loss.

Let’s say that the Stop Loss level for this trade is determined to be 55.0 pips and the cost of one lot is $1.00.

Maximum Stop Loss (MSL) = 0.0055 * 1.0 * Mini-Lot Size = $55.00

For the possible slippage we add additional 20%:

MSL = MSL * 1.2 = $66.00

My broker takes a margin of $500 for one mini-lot, so what we need for one lot is:

Funds Required (FR) = MSL + Margin = $566.00

So in our example, the system can afford to trade this size:

Size = FA / FR = 17.6 mini-lots.

Okay, but what about the proportional trading I was talking about at the beginning?

The answer is: to control the trading size, GSystem is not using full FA value each time it enters a trade. There is a portion of the balance that I call Reserved Funds (RF) and it is taken to the equation on the very first step:

FA = Account Balance – Reserved Funds + Open Equity – Used Margin.

But how the RF works? It’s simple. At the begin, there is no Reserved Funds. Then, after the system gains a predefined amount of money (let’s say $5,000), it automatically puts part of it (let’s say $3,000) to the RF. So the account grows, and RF grows as well (but not in a linear proportion).

The Reseved Funds are under control of the trader operating GSystem and in case of need, a part of the RF might be put back into FA or some money might be added to RF manually – it’s one of the reasons why GSystem is not a robot, but rather a Supervised ATS.

There are some additonal built-in restrictions on a position size built into GSystem, for example, minimum and maximum allowed trade size for each instrument and for the whole portfolio, but that is a pure logic and does not require much explanation.