Difference Between Fixed Fractional and Fixed Ratio?

Discussion in 'Risk Management' started by tommo, Feb 10, 2009.

  1. tommo


    Hi all,

    Could someone please explain the difference between these to MM strategies?

    I like fixed fractional risking a predefined % of your account on everytrade because its simple and you are compounding when things go well and scaling back when you arent.

    From what i understand fixed ratio does the same, but instead of increasing or reducing the account size on everytrade you say the account has to go up 5% before i increase my size by 5%, for example.

    But isnt that curve fitting? Its easy to say "increasing my size after that win would have been the optimum time to do it" etc etc

    Id be interested to hear your thoughts
  2. MGJ


    Fixed Ratio is explained in (this book) by Ryan Jones. One of the best ways to explore it, is to program Fixed Ratio and Fixed Fractional into a trading system backtest simulator, and run them. See which one gives results that you like best (or, dislike least).

    Fixed Fractional positionsizing has one user-adjustable parameter, r (the % of account risked per trade). Fixed Ratio positionsizing has two parameters: S and Delta. Jones's book explains them in detail; you may find it surprising that neither one of them is a percentage.
    md2324 likes this.
  3. Take a look at this:


    IMO, fixed ratio is NOT a risk management method but an attempt to maximize equity growth GIVEN that profit accumulates. In another sense it is a formula for pyramiding.

    %Kelly is much more effective provided you have a profitable trading system:


    I am surprised so many people still confuse risk management with equity growth maximization.

    The only method that guarantees trader control over risk is the fixed fractional.
    md2324 likes this.
  4. tommo


    "IMO, fixed ratio is NOT a risk management method but an attempt to maximize equity growth GIVEN that profit accumulates"

    What are your views on fixed fractional as an effective means to maximize equity growth?
  5. Fixed fractional risk using net equity minus any open position P/L is essentially both a risk management and a money management method. It is not optimal though in the sense that it is hard to know the percent risk value that maximizes some objective function. You can theoretically adjust the level of risk to achieve higher equity groath.

    It is only when you restrict fixed fractional risk to the initial account deposit that it is a just a risk management method.

    This is how I view this, of course.
  6. I agree with you intra...
  7. Bill,

    Those were great links, thanks!

    Do you own and use Stator?

  8. Someone I know who is managing a small fund it using it and when I show it I liked it a lot. I use by broker's software for managing my positions for now.