I have been doing some risk modelling in MooDB to determine how I can grow a small account to a large account in the shortest possible time but without increasing my risk significantly. Let me stress the point that I DON’T want to take on a large amount of risk to grow my account. Sounds like an impossible task, however when I show you what I’ve done it should set your heart racing to those of you unaccustomed to using dynamic risk profiles. Let’s start with the original figures:

• 2% fixed risk per trade
• Largest drawdown on the phase 2 account so far: 3.29%
• Expected drawdown for 10 consecutive losers: 17%
• End account balance during phase 2 if starting with $10,000: $27,183

Now, compare those figures with the dynamic risk figures. Instead of using a dynamic risk of 2%, let’s shake things up a bit and make them more interesting and use a dynamic risk of 4%. The risk profile configured is to only allow a 10% drawdown after 10 losing trades on the account. Here’s how things look now:

• 4% dynamic risk per trade
• Largest drawdown on the phase 2 account so far: 3.71%
• Expected drawdown for 10 consecutive losers: 10%
• End account balance if starting with $10,000: $54,083

These figures should smack you in the face (they did me, I had to pick myself up off the floor). Read both sets of figures again. Interesting, stuff! So to summarise I can increase my current drawdown by only 0.42% but achieve an extra 100% growth on my account. I find that utterly astounding. But it gets even better! I have actually reduced my risk profile because if I get 10 consecutive losers in a row using dynamic risk, I only reduce my account by 10%. However using 2% fixed risk reduces my account by 17% (significantly more).

Here’s what the equity curve looks like using 4% dynamic risk:

Phase 2 results using 4% dynamic risk (click to enlarge)

This has to be my favourite post on the blog so far. I hope you enjoyed it.

In the last free MAX webinar, one of the instructors explained a very effective method of reducing drawdown by reducing the amount risked per trade when in a losing streak. The amount risked per trade is calculated by a formula called the Account Nanny. There are input parameters to this: max drawdown %, number of trades to reach max. drawdown and initial risk %.

I have taken 87 trades so far in phase 2 of the Max training (see earlier blog posts for an explanation of phase 2) and have used a static 2% risk per trade. The results for this are:

• Max Drawdown for the account: 3.29%
• End Balance using start Balance of $10,000: $26,972
• Ratio of avg % account increase of winners over losers: 3.05

Equity curve with a static 2% risk per trade

When I implement the account nanny using the following values:

• Max drawdown: 10%
• Initial risk: 2%
• Max Losing trades: 10

I get the following change to my trading results:

• Max Drawdown for the account: 2.44%
• End Balance using start Balance of $10,000: $25,526
• Ratio of avg % account increase of winners over losers: 3.25

Equity Curve using Account Nanny

As you can see the max drawdown is reduced significantly making the trading system much safer and giving me a feeling of security. There is however a “cost” for the reduced risk that the account nanny provides, and that is a 5% reduction in the end account balance. The ratio of % account gain for winners / % account gain for losers rises to 3.25 from 3.05. In other words the winners make 3.25 times as much for the account on average than the losers take from the account. This is a nice figure and is better and slightly safer than using a static risk.

The formula for the Account Nanny is being withheld for the moment as it will become part of a future Max course, however you can get some good information about it from the free webinar video and you can probably come up with a cruder version yourself if you want to. Mathematicians among you can probabably work it out easy enough. So, food for thought – if you find yourself in a losing streak, progressively reduce your risk per trade until you are out of the losing streak, or when you reach a maximum number of trades you want to lose (and then stop). If you reach your maximum number of losing trades, then it’s time to rethink your system, or analyse where you may be going wrong with your existing system.