How to determine the number of future contracts

There are two questions in this index pairs trading strategy:

1. The ratio of long/short contracts
2. The number of future contracts

At the beginning of 2015, 1 contract of E-mini NASDAQ 100 Index (NQ) is worth  $85, 459. The value of 1 contract of mini size of Dow Jones Avg Index future (YM) is $89,692. At the market close of April 30, these numbers are $88, 285 for NQ and $89, 202 for YM. Therefore, maintaining 1 for the ratio of long/short contracts is appropriate.

Backtesting results indicate that the maximum potential loss from our pairs trading strategy is less than $2000 per contract. However, in order to control the risk and the leverage, we would open 1 long/short contract for each $10,000 cash in the trading account. This will be sufficient to buff any market shocks.