|
PureBytes Links
Trading Reference Links
|
> >The size isn't the issue; it was reductio ad absurdum. Jones says
> >you should always require the same gain *per contract* when going
> >from X to X+1 contracts, whether X is 1, 2, 5, 10, or 100. That
> >means you require increasingly large profits per contract to increase
> >your position size by 1.
>
> This doesn't sound right. In fact, it is exactly the opposite. The
> whole basis of Fixed Ratio is that the per contract profit
> necessary to add another contract is always the same no matter how
> many contracts you are trading.
I'm not quite sure where the communication gap is here, but you're
saying exactly what I said. I said "Jones... require[s] the same
gain *per contract* when going from X to X+1 contracts." You said
"the per contract profit necessary to add another contract is always
the same." Aren't those two statements saying the same thing?
> I think this might help. ... This is the core of Fixed Ratio.
> The profit per contact needed to increase position size is a constant.
We are in violent agreement. :-)
> >If I remember correctly, Jones' book has a formula for determining
> >it, and I disagreed with the logic of that too, but I don't remember
> >the details.
>
> I think what you say above is the cause of a lot of our difference
> in perception. This is a quote from the Jones book: "The word
> delta stands for change. It is the only variable in the equation
> that the user freely changes to fit a particular method and/or
> trading style."
Hm. I'd have to dig up a copy of the book to recall the part I'm
thinking about, where he sets forth some formula to calculate
something based on the contract size & a few other things. I thought
it was the delta but I could be wrong.
> However, you keep talking about Fixed Ratio as having excessive
> risk. I want to clearly point out that the risk of Fixed Ratio is
> in direct proportion to the delta value. You can trade Fixed Ratio
> with less risk by increasing the delta value.
I absolutely agree. You can use a lower value of delta (though I
would have *sworn* he specified the level for you, hmmm) and it would
be much safer. In that case you would also reach the crossover level
to fixed fractional much sooner, because fixed ratio would stall out
a lot sooner.
However, the examples in Jones' book use a higher value of delta. As
I said before, the exact same example with the exact same delta and
the exact same drawdown would bankrupt you if the drawdown happened
early on when the leverage is high. I felt Jones glossed over that,
implying that fixed ratio protects you from drawdowns while speeding
up your account growth, and that's the core of a lot of my
disagreement with his book.
As someone on the traderclub discussion said, Fixed Ratio is in some
ways a form of curve-fitting, just like Optimal F. Opt F is the risk
level that will produce the highest gains **in the test period**.
But trading it forward is a near-guaranteed recipe for disaster.
Similarly, fixed ratio works great if you carefully select when the
drawdowns happen, but you don't get to do that in real life.
I think the best way to settle this would be to take a series of
trades, and run a Monte Carlo analysis on them. Use Fixed Ratio on
each randomized set of trade sequences. That way you can't "cook the
books" to select examples that fit your preferred method. See which
one works better. I'm not interested in fixed ratio so I don't have
the time or inclination to do this, but I think it would give a
pretty clear answer.
> I think Fixed Ratio is also an approach to consider. I think that
> your extreme criticism of Fixed Ratio is based upon some
> misunderstanding, which I hope I have explained above.
No, I understand it quite clearly, and I agree with all your
explanations. I just don't agree with the way he presents it and the
risk HIS EXAMPLE USES OF THE METHOD exposes you to. If he was aiming
the book at sophisticated traders I would just shrug and say they're
big boys, they know what they're getting into. But he's aiming his
book at people who haven't figured out they can make more money by
increasing their size, fer cryin' out loud.
I have no problem with teaching dangerous subjects like advanced
chemistry experiments or skydiving. I just wouldn't teach them to
kindergarteners, or I would at least be careful to explain their
dangers.
Gary
|