Why the ES mini is no longer a mini contract and why your future losses may be much larger then your backtest suggest…

In 2009, the SPX was around the 1100 mark. Today, the SPX is stands at 2738. In 2009, one ES contract was worth approximately $55,000 notional value. Today, one ES contract is worth approximately $136,000.  In 2009, a 2% move would work out to an approximate 22 point movement or $1,100 move. Today, the same 2% move would equate to a 55 point move or $2,750. It is more likely that a percent change will be more stable then a point movement because futures represent notional values. Notice, I am referring to a percentage change on the index and not the futures.

This means that traders who are trading systems based on fixed stops are much more likely to be stopped out then the historical backtest might suggest. What is interesting is that even if a system were optimized on a walk-forward basis then unless information from previous regimes was captured and translated then those walk forward tests are likely to be wrong too when the market regime changes.

What’s a better way? A better way might be to track the maximum percentage move for a given VIX level and then convert that into points. For example, if at a VIX of X the maximum percentage move was 3% then you would convert that into points for the given price level and that or a derivative thereof would define your stop loss.

Let me know what you think about my idea and whether or not you agree or disagree and why.

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