Educational Information from AlgoTradingBots

What is position size and margin?

Position Size:

Position size refers to the number of contracts you are trading. This is a critical factor because it determines how much you are risking per trade and how much each price movement (e.g., 1 point or pip) is worth. For example, if you are trading with a size of 1, which is worth €1, then every point movement will result in a profit or loss of €1.

Examples:

  • 1 size = €1 per point
  • 2 size = €2 per point

Margin:

Margin is the amount of capital required to open a position. When you trade with margin, you are borrowing money from your broker to trade a larger position than your available capital allows. The broker requires a certain amount of margin as collateral to cover potential losses.

  • If you are trading €1 per point with leverage, your margin requirement may be much lower than your actual position size.

Example:

  • Trading €1 per point with a position size of 1 might require a margin of €1,000 (depending on leverage and market), but the potential profit or loss will be based on the total value of the position.

Here is IG’s definition of margin requirement.

Money Management: What is it and how does it affect performance

Money management is the practice of managing risk and optimizing returns in your trading account. It is a key element of all trading strategies and plays a crucial role in long-term success.

Position Size:

Position size should be determined by the risk I am willing to take and the distance to my stop-loss. Larger position sizes increase the potential profit but also increase the risk.

Leverage and Margin Use:

Using too much leverage can lead to quick profits but also larger losses. Proper money management means using leverage cautiously.

Effect on Performance:

Good money management ensures that your account grows steadily without exposing you to excessive risk. Poor money management, on the other hand, can lead to large drawdowns or even the loss of the entire account. Risk management controls emotional trading and reduces the impact of losses while allowing for consistent growth.

How we calculate the percentage monthly return

We use the components described in previous sections. We use Margin (the margin requirement) x 2 = "Starting Capital."

The monthly return is then calculated in (euros / starting capital), giving a percentage figure. This is how we calculate monthly returns as a percentage. We only include data from the past 12 months to fairly compare all algorithms.

We would also like to note that "starting capital" is not something we recommend. It must be specified for calculation purposes. We do not want to influence how you use your algorithms in your account.

How we calculate margin and CAGR from backtest

Margin Calculation: (How much money do you need for a certain position size?)

Margin requirements vary depending on leverage and the asset being traded. To calculate margin:

  1. Visit IG's website and input the position you want to use for a particular market. The margin requirement will then be displayed.

Example:

For US Tech 100 (€1) with a position size of 2.4, a margin of 2,797€ is required to open that position. Note that margin requirements change depending on the price of the underlying asset.

CAGR (Compound Annual Growth Rate) from Backtests:

CAGR measures the growth rate of your capital over a specific period.

Formula:

CAGR = [(Final Value / Initial Value) ^ (1 / Years)] - 1

Example:

  • Starting capital: €10,000
  • Final capital after 3 years: €20,000

CAGR = [(20,000 / 10,000) ^ (1 / 3)] - 1 = 0.2599 = 25.99% CAGR

CAGR helps to understand the average annual return you can expect from your strategy over the backtested period. In our backtests, we use a starting capital that is 2 times the drawdown from the backtest.

Results and Fees

We want you as a client to feel safe and confident with the results you see with us. That is why it is important that we explain how our figures are presented and why.

All results are shown excluding external fees, such as overnight fees (swap/financing costs) that the broker may charge when a position is held open after closing. Not all algorithms keep positions overnight, which means these fees do not always apply. If you want to know more about exact fees, you can always read directly at the broker.

To guarantee fair and unaffected results, all data is retrieved directly via a built-in API. This means that there is no manual influence from our side – what you see is exactly what the algorithms have achieved on the account.

We have also chosen to run all algorithms on separate demo accounts. The reason is simple:

  • Demo accounts are not affected by private deposits or withdrawals, which makes the results more consistent and comparable.
  • The algorithms can run continuously without interruption, which is not always possible on private live accounts.
  • On private accounts, you may over time want to increase or decrease your position size for various reasons (e.g. risk adjustment or changed capital). On our demo accounts, however, the algorithms always run with the same position size year after year, which makes the results more reliable and comparable over time. We have done this consistently since 2020 when we started renting out our algos.
  • Differences between demo and live are very small (estimated at about 1 trade out of 500 may differ), which means that in practice the results are almost identical.

We have chosen this setup to give you as a client full transparency, clear results, and the greatest possible security when you follow the development of our algorithms.