Account Size Required And Return On Account

The account size required and return on account are probably the most deceiving numbers of them all. As you can see by looking at Figure 1.1, which shows the performance summary for an early version of Black Jack/Meander system in TradeStation, the account size required is the same as the value for the max intra-day drawdown. But this is a purely theoretical figure produced with the help of hindsight; there is no way for you to know that number before you start trading, and there certainly is no guarantee for this value to hold up in the future.

To calculate the return on account, TradeStation simply divides the total net profit by the account size required. The main thing wrong with this number is that

TradeStation Strategy Performance Report

TradeStation Strategy Performance Report - Book The Meander fi SP_0_I0B-Daily

Performance Summary: All Trades

Total Net Profit Gross Profit

Total # of trades Number winning trades

Largest winning trade Average winning trade Ratio avg win/avg loss

Max consec. Winners Avg #bars in winners

Max intraday drawdown Profit Factor Account size required

$79,107,500 $226,547,500

137 81

Open position P/L Gross Loss

Percent profitable Number losing trades

Largest losing trade Average losing trade Avg trade (win & loss)

Max consec. losers Avg #bars in losers

Max # contracts held Return on account

435.19%

nrrr

±LL_r , . , —;—^ , . ..,.',., ... ■ ■ v

Summary 1 Trades | Analysis] Annual | Monthly! Weekly] Daily] Win I Loss] Time Graphs j Settings |

FIGURE 1.1

The performance summary for an early version of Black Jack/Meander system in TradeStation.

it is supposed to be calculated at one point in time (before you start trading) with the hindsight from two totally different points in time (during trading for the worst drawdown and when finished trading for total net profit). Perhaps even more important from a real-world point of view, no trader in his right mind would start out with a trading account that is only expected to cover his worst historical drawdown, especially because this drawdown figure has no connection to the future whatsoever and is very likely to be exceeded. Thus, because there is no way to know your exact largest future drawdown or ending equity, you have no idea about how large your trade account must be and consequently no way of estimating the return on your account either. Therefore, these two figures are completely unnecessary and provide you with no information whatsoever.

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