Three gates for a futures book: equity risk, expected value, and shrinking pyramids

Losses as a portfolio-control problem

Futures losses are attributed mainly to weak portfolio control. Risk control and diversification are treated as usable even if prices are regarded as unforecastable.

Portfolio risk is split into systematic risk and statistical risk. Systematic risk is the group-relative volatility of one market versus its commodity complex. Statistical risk is the extra uncertainty created by representing too few distinct markets in one book.

Lock the equity fraction from the stop

A pre-entry and in-trade filter bounds loss or exposure from account equity, volatility, stop distance and current size. A single position is not allowed to risk more than 3 percent of equity in a non-diversified book, 5 percent in a moderately diversified book, or 10 percent in a well diversified book.

In a non-diversified book, no more than 50 percent of account equity is placed in traded positions. The stop sets the loss that this equity fraction is allowed to meet, so size is chosen before entry and kept inside the same bound while the position is held.

Open only when expected profit dominates

Expected value is a pre-entry filter that compares probability-weighted possible return with probability-weighted stop loss before size is committed. Before entry, expected profit is success probability times possible return, and expected loss is failure probability times the stop-defined risk.

A position is opened only when expected profit is much larger than expected loss. Expected position growth is that difference: expected profit minus expected loss on a single trade. Expected portfolio growth is the sum of those position figures.

Add later size only on a working trade

Pyramiding is a holding-period add-on rule that increases a winning position in shrinking increments under stated market and size constraints. After a favorable move, added size uses fewer contracts at each step, only in very large books, and only on reactions against the main trend.

Adding to a losing position is treated as raising exposure on a failing trade. Editorial: later size is read here as an add on a working trade, not as a repair for a loser.

Judge results by return relative to variability

Performance is judged by return relative to the standard deviation of returns over time. That return-to-risk ratio is identified as the Sharpe ratio.