Topic: Maximizing the initial position (safely)
I'm studying the spreadsheet of stats that I keep for each bot that gets created by FSB. I am toying with a new idea today that I wanted to kick around and see if someone can shoot down my logic.
What I mean is -- I am admittedly not the best math person. What I'm trying to find here is the MAXIMUM percentage of equity that can be spent on the initial position, while at the same time maintaining what I perceive to be a safe drawdown level.
The "safe drawdown" level is defined as the max drawdown I want to experience from the bot, and assuming the bot is performing within spec. The spec will be defined as the max equity drawdown that was experienced during the test. Therefore, if the bot should exceed this level in forward testing or live trading, I would know that it has become out-of-spec.
Starting from my spreadsheet, I look at the stats generated from the bot. From these figures, I have come up with this formula. Please see if you can shoot this down as a "bad idea" and tell me why. Am I wrong in my math here?
Stats that I know from the test:
initial position: 3% equity
max equity DD% during test: 2.87%
If we know that 3% initial position equated to 2.87% max DD equity,
then would you also agree that 6% initial position would equate to 5.74% max DD equity?
(NOTE: if the above statement is wrong, please let me know!)
Therefore, in order to maximize the performance while keeping equity DD within my target threshold (lets say 20%), then I could apply this formula:
3% initial equity x% target initial equity --------------------- = ----------------------------- 2.87% max DD 20% target max DD 2.87x = 3 * 20 x = 20.91% --> optimal initial position equity
It should also be noted that (I believe) FSB/FST would round-down the broker lots, so that should theoretically keep my DD within the target spec.
Assuming this theory is all correct ... I know that DD could exceed the target level. But doing so would violate the spec of the original bot and be an indication that it needs more work (or stopped working as tested, for example).