Trade parameters 3 - investment control

The trade size - the number of contracts or currency units purchased - can be determined in three different ways. For directly ordering a certain number of contracts, use Lots. For investing a certain amount of your account balance, use Margin. For risking a certain amount by determining the worst case loss, use Risk.


Trade size given by the number of lots per trade (default = 1; max = 99999). This is the unit used for sending orders to the broker. One lot is the smallest possible order unit of the active account (see remarks). In binary trading mode (BINARY flag) or if Margin or Risk are used for calculating the trade size, Lots determines the minimum number of lots to be opened per trade (normally 1). If Lots is 0, no trades are opened. If Lots is -1, trades are executed in phantom mode (see below); they are only simulated, but not sent to the broker.


Trade size given by invested margin per trade, in units of the account currency (default = 0.0001 for always opening at least 1 lot). With no leverage, Margin is simply the money invested to purchase the asset. On a leveraged account, Margin is a fixed part of the real trade size - for instance 1% at 1:100 leverage - that the broker keeps as a deposit for opening a trade. As long as the trade is open, the margin amount is locked on the account and can not be used for further trades (of course the loss of a trade can be higher than the margin). If Margin is 0 or negative, no trades are opened. Otherwise the trade size is calculated from the given margin.
  The Lots variable still determines the minimum number of lots to be opened per trade. If the trade size by Margin is lower than Lots and the MARGINLIMIT flag is set, trades are skipped. If the ACCUMULATE flag is set, the size of skipped trades is accumulated until it reaches the Lots amount. Keep Margin at its default value for controlling the number of lots only with the Lots variable.


Trade size given by the trade risk in units of the account currency (default = 0 = no risk limit). The risk is the theoretical maximum that a trade can lose; it is determined from trade size, stop loss distance, commission, and spread. Since risk is undefined when a trade has no stop loss, the Risk parameter must always be given in combination with Stop. If the risk of a trade at the given Margin is higher than the Risk variable, the trade size is accordingly reduced.
  When the RISKLIMIT flags is set, trades are skipped when even with the minimum amount (1 lot) the trade risk is still higher than twice the given Risk value. When Margin is not set, the trade size is only limited by Risk; this can lead to extreme trade sizes and subsequent margin calls when the Stop distance is tight. Due to slippage and minimum lot amount, the displayed risk in the trade log can deviate from the set up Risk value especially with tight Stop distances. A stopped out trade can lose less or more than Risk.


Initial invested capital in units of the account currency (default = 0 = no initial capital). This has no effect on trading, but on the calculating the strategy performance in the simulation. Set this to the initial capital when the strategy reinvests profits; Zorro then calculates CAGR instead of AR and determines performance parameters from the invested capital instead of the required capital. If drawdown plus margin exceeds Capital and Leverage is above 1, Zorro will declare a Margin Call and abort the simulation. Thus make sure to set Capital well above the required capital on leveraged accounts, and to limit reinvestment so that negative equity is avoided.




Equity curve trading

Equity curve trading is a method of avoiding losses by detecting and skipping unfavourable market periods or the expiration of strategies. The system monitors the equity curve separately for any asset and algorithm of the strategy. When unusual losses are recognized, real trading with that component is automatically suspended and all future trades are simulated in phantom mode (see above). The results of the phantom trades are still recorded in the equity curve as if they were real trades. But no money is invested until the equity curve shows that the market became profitable again.

Many methods can be used for determining if the market it profitable or not. In the example below, the equity curve is permanently compared with its own long-term average by lowpass filtering. It the equity is below average and still falling, trading switches to phantom mode; it goes back to normal as soon as the equity curve is rising again. Other methods may be based on the balance instead of the equity curve, or on the ratio of winning to losing trades.

Equity curve trading is not a 'holy grail'. It does not improve the performance when there is no clear distinction between profitable and unprofitable market periods. But it can often reduce the risk of a system. An example of a system that suddenly became unprofitable is the 'Luxor' strategy in the script examples; here equity curve trading would have drastically improved the overall result. According to our experience, equity curve trading is recommended especially for systems that use many algorithms for distributing risk (such as Zorro's Z1, Z2, and Z12). It does not make much difference in backtests, but it can make a large difference in live trading.


// set margin from slider
Margin = slider(1,500,0,2000,"Margin","Average margin in $");
if(Margin > 0) Lots = 1;
else Lots = 0; // don't trade when slider is set to 0
// equity curve trading: switch to phantom mode when the equity 
// curve goes down and is below its own lowpass filtered value
function checkEquity()
  if(Train) { Lots = 1; return; } // no phantom trades in training mode
  vars EquityCurve = series(ProfitClosed+ProfitOpen);
  vars EquityLP = series(LowPass(EquityCurve,10));
  if(EquityLP[0] < LowPass(EquityLP,100) && falling(EquityLP))
    Lots = -1; // drawdown -> phantom trading
    Lots = 1; // profitable -> normal trading

See also:

enterLong/Short, Stop, Spread, PIP, PIPCost, MarginCost, Win/LossPayout


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