Match futures starting capital to system risk

Too little capital and too much capital

Undersizing a futures account relative to a system's typical equity swings can force a trader to stop after a large percentage drawdown even if the dollar path was already known in testing.

Oversizing an account relative to the same portfolio can leave unused capital and reduce the return earned on the money committed to that book.

Follow the method, not only the contract

Two traders holding the same futures contract still face different long-run account risk if their systems produce different equity-swing profiles, so capitalization should follow the method rather than the instrument alone.

Volatility position sizing and a Drawdown limit keep a loss or exposure decision bounded before a trade is placed and throughout the position. The starting balance still has to be large enough to live through that system's own equity-swing profile.

Rules of thumb stay coarser than a full trade history

Common rules of thumb such as three times margin, or margin plus a tested maximum drawdown, are safer than trading at exchange minimums but still coarser than sizing from a full trade history.

What Optimal f sizing does not constrain

Optimal f sizing converts a system's largest losing trade and its f value into a minimum account size for one contract, but that size is designed to maximize long-term growth and does not constrain drawdown.

In the supplied gold example, an optimal f of 0.33 and a largest losing trade of $3,000 implied $10,000 of capital for one contract.

Aggressive, conservative, and midpoint capital

An account-sizing process that first builds aggressive and conservative capital estimates, then averages them, lets a trader choose higher return with larger percentage drawdowns, lower return with smaller percentage drawdowns, or a midpoint between the two.

The worked five-contract portfolio produced an aggressive size of $61,690, a conservative size of $161,723, and a midpoint optimum of $111,706.

Reset to those starting balances each year, the aggressive book showed a 31.0% average annual return and a 50.9% worst drawdown, while the conservative book showed 11.8% and 19.4%, and the midpoint book showed 17.1% and 28.1%.