|
PureBytes Links
Trading Reference Links
|
> Just curious to hear experiences of traders who are using
> the Fixed Ratio money management method of Ryan Jones.
I posted the following on the Code list last year. Now this will be
in the Omega archives so I can just point to it there. :-)
==========================================================
I read "The Trading Game" last weekend, and I was NOT impressed.
First off, I find it remarkable that people can get so much attention
for the radical concept of position sizing. I mean, are there that
many people out there who don't understand that you'll make more
profits (assuming a positive expectation) if you trade multiple
contracts!? Jones talks like scaling your size up is a huge
revelation.
But ignoring that, I think his Fixed Ratio approach is bogus. IMO
his entire premise is flawed: he looks at the per-contract profit it
takes to move from 1 to 2 contracts, and he says that it should take
the same per-contract profit to move from X to X+1 contracts. I.e.
if you need $10k profit to move from 1 to 2 contracts, you should
need $10k profit **per contract** to move from 100 to 101. You'd
need $1M total profit to increase by 1 contract.
I think this is flawed for 2 reasons: first, it relies much too
heavily on the size of the contract. The entire leverage structure
he computes would be totally different for, say, $250 SP's vs. $500
SP's. But the big flaw is his use of additive growth instead of
percentage growth. Moving from 1 contract to 2 isn't equivalent to
moving from 100 to 101; it's like moving from 100 to 200! I think
simple fixed-fractional approaches handle the position sizing much
more logically.
What really honks me off, though, is the way he cooks the books to
make his approach look good. Fundamentally what he's doing is using
very high leverage when the account is small, and backing off as the
account gets big. This has the advantage that it gets the small
account off the ground & running quickly. But it also exposes you to
a lot more risk early on. He uses all kinds of examples to show how
the FR approach can take a $X per contract loss with a much lower
drawdown than FF -- but he constructs his examples so that drawdown
happens AFTER he's scaled back the leverage. He conveniently
neglects to mention that the FR approach would BANKRUPT you if that
same per-contract loss happened early on with higher leverage.
Add to that a host of logical and math errors, and I was SERIOUSLY
underwhelmed.
My advice would be to use a basic Fixed Fractional approach. Decide
what leverage works for you, taking into account your risk tolerance,
the Optimal F of your system (make sure you trade far UNDER the
"optimal" F value), etc, and just risk a constant percentage on each
trade. As your account grows, you may decide to back off on the
leverage a bit. You can do all that without the Fixed Ratio
complexities.
Gary
PS: According to
http://groups.google.com/groups?hl=en&selm=9c957579.0201081404.5c89813
c%40posting.google.com
Jones traded himself into a 95% drawdown, presumably using his own MM
techniques. I can't verify the accuracy of that claim, but it
wouldn't surprise me at all. As I explain below, all it takes is a
drawdown ***early in the account's life, while Fixed Ratio has you
using dangerously high levels of leverage***, to produce results like
that.
|