"Method of calculating risk management for EA"
EA developer Reiwa no Daburu II here.
This time「Calculation method for EA risk management」 is explained.
Risk management is, like choosing an EA, considered extremely important.
Users who run the EA
and how large a lot size to set relative to their funds,
each user has a different “risk tolerance,” so
it cannot be stated universally by the EA developer.
In other words,
Ideally, users themselves should be able to calculate the risk.
If you cannot calculate risk,
even an EA that should not fail could fail because the lot size is too large,
which is quite possible.
Now, let's explain the calculation method.
【Calculate from backtests】
First of all, what I want to say is,
“Calculate from backtests.”
If you are a proper EA developer,
you verify the edge of the created logic through backtests.
In other words,
“EA is developed based on backtests.”
Therefore,
you can roughly estimate the EA’s performance from backtests,
and you can also roughly estimate risk calculation,
【Items used in risk calculation】
The items used in risk calculation are,
“maximum drawdown,” “lot,” and “maximum positions on one side.”
【Formula for risk calculation】
The risk calculation can be computed with the following formula.
“Maximum drawdown” + “required margin”（Note: both lots must be unified）
Backtest result example)
Currency pair: USD/JPY
Maximum positions on one side: 1
Rate: 150 JPY per USD
Leverage: 25x
Lot size: 0.1 lots
Maximum drawdown: 40,000 JPY
At this time, the calculation for required margin is,
Rate (Yen) × Lot (currency) × Maximum positions on one side ÷ Leverage =60,000 JPY
In other words, the required margin is 60,000 JPY.
(※ Excluding settings with variable lots such as martingale and averaging-in)
Therefore, the risk calculation formula is
“Maximum drawdown” + “required margin,”so 40,000 + 60,000 = 100,000 JPY per 0.1 lot
That is,
in past backtests, at minimum, 100,000 JPY of funds were required per 0.1 lot,
that is the conclusion.
Also, calculations for currencies without yen, such as EUR/USD, are done using EUR on the left as EUR/JPY at that time for the above calculation.
This is very important and essential for EA operation, so please remember it.
【How to decide lot size based on tolerance】
The above calculation is,
merely a calculation ofFor example, the ratio of funds to lot size above is 0.1 lot per 100,000 JPY.
If you operate with this ratio, in past backtests there was no collapse, but
when the maximum drawdown occurred, you must consider whether the maximum drawdown is acceptable for you.
This is extremely important to continue EA operation.
In this case, with 100,000 JPY funds, the maximum drawdown is 40,000 JPY,
so if the drawdown occurs right after starting operation, you would lose 40% of your funds.
If you feel this 40% is large,
either reduce the lot size further or increase the initial capital.
If the lot size becomes 0.05, the maximum drawdown becomes 20,000 JPY, and
if the maximum drawdown occurs right after starting operation, you would lose 20% of your funds.
Thus,
adjust to a lot size you can be comfortable with.
Originally, there should be no concept of a “recommended lot.”
Whether you feel it is a “recommended lot” is up to each person.
Please become capable of setting your own lot sizes.
Well then!
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【Reiwa no Daburu II EA product list】
https://www.gogojungle.co.jp/users/112481/products
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【Reiwa no Daburu II series articles】
■EA Beginner’s Course
https://www.gogojungle.co.jp/finance/navi/series/1700
■No-nonsense! Gogojungle Issue!
https://www.gogojungle.co.jp/finance/navi/series/1701
■ Double-E FX Musings
https://www.gogojungle.co.jp/finance/navi/series/610
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【Reiwa no Daburu II's Beliefs】
Develop EA by a proper method,
gain the trust of more people,
and maintain a long-lasting WIN-WIN relationship,
aiming to invigorate the EA market and improve literacy.
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