Money Management

Before committing your hard earned money to live Pair Trading there are a number of money management decisions you need to make:

1. What is the minimum capital requirement?

Trading should be treated like a business, and most business fail to succeed in their first year mostly due to a lack of capitalisation – trading is no different. You need realistic expectations about how much capital is required and how the ebbs and flows of trading will impact your account balance. Using leveraged instruments like CFDs for example with a capital investment of $10,000 should be the minimum required.

2. How much leverage and drawdown can you tolerate?

Professional trading system developers use the data generated from back testing to help ascertain appropriate position sizing levels for trading their system. However, a trading system is made up of several pairs and the combined trade performance between them. The running profit and loss of your trading system is also determined by the amount of leverage, slippage, and transaction cost applied.

Using a software application like Market System Analyzer you can simulate different money management strategies to determine critical performance statistics like: Maximum system draw down, maximum number of consecutive losses, average return on investment by week and many more. Armed with this information you should have a very good idea about how much leverage to apply to your Pair Trading system, and what maximum draw down (loss) to expect.

Implementing proper money management to your Pair Trading is critical to your success, and for people who don’t have the time or discipline to research the optimum position sizing for their Pair Trading system then fill out your details to the right and a licensed professional will contact you.