### Algorithm Overview This cheatsheet outlines a trading algorithm designed for a \$5000 starting capital, targeting a 7.5% weekly return over 4 weeks with a strict 1% risk per trade. The strategy focuses on compounding returns weekly. **Goal:** Achieve 7.5% weekly growth on compounding capital. **Risk Management:** Max 1% of current capital risked per trade. **Duration:** 4 weeks. ### Initial Parameters - **Starting Capital (C_0):** \$5000 - **Target Weekly Return (R_w):** 7.5% (0.075) - **Risk Per Trade (K):** 1% (0.01) of current capital - **Trading Period:** 4 weeks #### Compounding Growth Target The capital grows each week by 7.5%. - **Week 1 Target Capital:** $C_0 \times (1 + R_w) = \$5000 \times 1.075 = \$5375$ - **Week 2 Target Capital:** $C_1 \times (1 + R_w) = \$5375 \times 1.075 = \$5778.13$ - **Week 3 Target Capital:** $C_2 \times (1 + R_w) = \$5778.13 \times 1.075 = \$6211.49$ - **Week 4 Target Capital:** $C_3 \times (1 + R_w) = \$6211.49 \times 1.075 = \$6677.30$ ### Risk Management per Trade For each trade, the maximum acceptable loss is 1% of the current capital. - **Current Capital (C_n):** Capital at the start of Week n - **Max Risk per Trade (L_T):** $C_n \times K = C_n \times 0.01$ This means if a trade hits its stop-loss, the portfolio should only decrease by $L_T$. #### Calculating Position Size The position size depends on the entry price, stop-loss price, and the maximum risk per trade. Let: - $E$ = Entry Price - $S$ = Stop-Loss Price - $R$ = Risk per share/unit = $|E - S|$ - $P$ = Position Size (number of shares/units) $$P = \frac{\text{Max Risk per Trade}}{R} = \frac{L_T}{|E - S|}$$ **Example:** - Current Capital: \$5000 - Max Risk per Trade: \$5000 * 0.01 = \$50 - Entry Price: \$100 - Stop-Loss Price: \$99.50 - Risk per share: \$0.50 Position Size: $P = \frac{\$50}{\$0.50} = 100 \text{ shares}$ Total Value of Position: $100 \text{ shares} \times \$100/\text{share} = \$10,000$ **Important:** The total value of the position can be much larger than the current capital, as long as the dollar risk is controlled. ### Weekly Trading Cycle The algorithm operates on a weekly cycle, adjusting risk and targets based on the *current capital* at the start of each week. #### Step 1: Determine Weekly Capital & Risk At the beginning of each week (n): - **Current Capital (C_n):** Total account value from the end of the previous week (or initial capital for Week 1). - **Max Weekly Drawdown Target:** While not explicitly defined in the 7.5% weekly gain, prudent management might set an internal weekly drawdown limit (e.g., 3-5% of C_n) to prevent excessive losses. - **Max Risk per Trade (L_T):** $C_n \times 0.01$ #### Step 2: Trade Execution for the Week - Identify trading opportunities. - For each trade: 1. Define Entry Price ($E$) and Stop-Loss Price ($S$). 2. Calculate Risk per Share ($R = |E - S|$). 3. Calculate Position Size ($P = L_T / R$). 4. Execute trade with calculated position size and set stop-loss. - Aim to take multiple trades throughout the week, ensuring that the *sum of potential losses from concurrent open trades* does not exceed a predefined threshold (e.g., 2-3% of C_n), even if each individual trade respects the 1% rule. This manages portfolio-level risk. #### Step 3: Monitor and Adjust - Continuously monitor open trades. - If a stop-loss is hit, accept the loss and look for new opportunities. - If a trade moves favorably, consider trailing stops or taking partial profits to lock in gains. - The goal is to accumulate enough profitable trades to reach the 7.5% weekly target. #### Step 4: Weekly Review & Compounding At the end of the week: - Calculate the new Current Capital (C_new). - This C_new becomes the C_n for the next week. - All subsequent risk calculations (L_T) will be based on this new, compounded capital. ### Performance Tracking & Adjustment - **Daily P&L:** Track profit/loss daily to understand intra-week progress. - **Weekly P&L:** Crucial for determining the new capital base for the next week. - **Win Rate:** Monitor the percentage of winning trades. A higher win rate helps achieve the target faster. - **Risk/Reward Ratio:** For each trade, try to target a minimum 1.5:1 or 2:1 Risk/Reward (e.g., if risking \$0.50 per share, aim for \$0.75 - \$1.00 profit). This is essential for achieving the weekly target even with a moderate win rate. #### Example Weekly Target Achievement To achieve 7.5% weekly gain risking 1% per trade, you would need: - Approximately 8 winning trades with a 1:1 Risk/Reward. - Fewer winning trades if the Risk/Reward is higher (e.g., 4 winning trades with 2:1 RR). - This implies a need for a good trading strategy that identifies high probability setups with favorable risk/reward. ### Summary of Capital & Risk per Week | Week | Starting Capital | Target Weekly Gain | Target End Capital | Max Risk per Trade (1%) | |:-----|:-----------------|:-------------------|:-------------------|:------------------------| | 1 | \$5000.00 | \$375.00 | \$5375.00 | \$50.00 | | 2 | \$5375.00 | \$403.13 | \$5778.13 | \$53.75 | | 3 | \$5778.13 | \$433.36 | \$6211.49 | \$57.78 | | 4 | \$6211.49 | \$465.81 | \$6677.30 | \$62.11 | **Note:** All calculations are based on achieving the target. Actual results will vary based on trade performance.