ok, I've finally gotten my act together. I'm consistently profitable and found a way to take me and my emotions out of my trading. Now I'm ready to start making some serious money. To do this I have to scale up. I have a small account so I don't think using a % risk per-trade is appropriate. What I'd like to do is add a contract in such a way that I'm only risking all the profits from the previous level (but no more). I'm guessing to do this all I have to do is estimate my max drawdown and then figure out how much profit I need to make before I can add a contract. For example, if I estimate my max drawdown for one contract is $1,000 then to go to 2 contracts I'd need $2,000 in profits. Then to get to a third contract I'd need another $3,000 in profits. If I started with $10,000 for one contract then I'd go to 2 when the account hit $12,000 and go to 3 when the account hit $15,000. I'm just trying to avoid gaining some money and then losing it all along with more money just because I screwed up my sizing. Is this the approach other guys with small accounts are using?
That is very similar to the fixed ratio method by Ryan Jones. http://www.powertesting.com/FixedRatioExample.html
Thank you it looks interesting and similar. I ordered his book on Amazon. I guess his Delta would be my estimated max drawdown. I know some here say use a fixed amount of dollars per contract such as $2,500 per-contract. I'm just trying to find out if this is what others with small accounts are doing or if there is something else I should be checking to scale up the account as it makes more money.
I suggest to go use this software MSA @: http://www.adaptrade.com/ You can get a 30-day free trial....but it incorporates many different money management (position sizing) technqiues and you can run equity curves based on historical performance of your trading/system...also run monte carlo sims, etc.....might help you find the right technique for scaling up.
I am surprised (and complimented!) to see my FixedRatioExample.html spreadsheet referenced in a post near the top of this topic. It is something I put together back in July, 2002. I never removed the file from the web site, but didn't realize anyone was still saving a link to the file. That FixedRatioExample.html spreadsheet is supposed to only be an attachment to a longer discussion. The original discussion is still sitting in the Omega List archive. Here are some of the posts I made. Also, if you look in the index around these dates you will find other posts, and responses to my posts. http://www.purebytes.com/archives/omega/2002/msg06738.html http://www.purebytes.com/archives/omega/2002/msg06763.html http://www.purebytes.com/archives/omega/2002/msg06858.html Here is the spreadsheet again, with an updated URL to my current web site address: http://www.PowerST.com/FixedRatioExample.html By the way, I am not meaning to advocate the Fixed Ratio strategy. I wrote those posts about Fixed Ratio to explain the strategy, because there was misunderstanding and people were making incorrect comments about the strategy. I understood the strategy from having worked with someone to program the strategy for backtesting, and I was only trying to explain it, not to advocate it. I do personally think that the Fixed Ratio concept could have merit for an individual trader stating from a smaller account, similar to the situation of the person who made original post that started this current topic. It all has to do with risk tolerance preferences. The Ryan Jones's book is very good and worth reading. Here is a short review I wrote separately from the above posts. <<<< Ryan Jones. The Trading Game, John Wiley & Sons, Inc., 1999, ISBN 0-471-31698-9. Although not obvious from the title, the main topic of this book is money management. The author also discusses some general trading topics in the later chapters, but the main topic is money management. Ryan Jones is the inventor of the Fixed Ratio money management strategy, and much of this book is detailing his reasoning used in designing this strategy. The progression through his reasoning yields some detailed discussion about some other money management strategies. As the developer of Fixed Ratio, Jones is very enthusiastic about this particular strategy. He wrote the book to detail his thinking about money management, and his thinking yielded this specific approach, so of course he goes into detail about why he feels his approach is best. Some of the things the book says about various money management strategies may be considered controversial by some. In fact, the whole Fixed Ratio strategy is very controversial. However, the book discusses much more than only the Fixed Ratio position sizing method, and certainly the discussion about money management is good background. Worthy of mention is that this book contains an excellent explanation of the dangers of Optimal F. Anyone possibly considering trading an Optimal F approach absolutely should read this book first. >>>> Here is the book on amazon: http://www.amazon.com/Trading-Game-...3190425?ie=UTF8&s=books&qid=1174523088&sr=1-1 I will mention that Gary Fritz made a good point in the original discussion that the same thing can be accomplished with Fixed Fractional position sizing by varying the risk percentages based upon account size. In fact, that would give you more precise control. However, the nice thing about Fixed Ratio is it a single formula. That's really all there is to it. - Bob Bolotin
gutsytrader you haven't thought of scaling down... with your fixed $1000 max drawdown approach, you will always end up with the original $10000... you see: $10000 (1 contract) - > $11000(2 contracts) -> $12000(3 contracts)->max drawdown hit->$10000 I think a fixed ratio will do what you really want to achieve
Hi, I am also considering an efficient way to scale up trading. I am choosing between fixed fractional and fixed ratio method. The former is a bit slower for me , so I am considering fixed ratio method. The point is I am curios to know, what is the weak point of this position sizing technique ? I am reading Ryan Jones' book but guess could not get answer from his own book. Thanks for any imput
Most analyses I have seen seem to show Fixed Fractional performs better. Bob Spears also has an algorithm that seems better than Ryan Jones has a lot of questionable behavior in him, if you do some history on him. I have gotten his constant permutations on "systems" reinvented many times at very high prices over the years. He also has tried to sell for $1K (his algorithm) at a pop many times.
These are really good explanation of the essence of fixed ratio method. I did some test and found that given a specific trading strategy ,the risk involved in this MM model is purely a function of delta, as well as the initial equity. By adjusting these two imputs,there can be countless variations of Jones' original method, and one can thus integrate this MM method with his own unique risk tolerance.