Ryan Jones on his Fixed Fractional strategy.......
Posted: Tue Nov 08, 2005 10:01 pm
Did anyone try it in TradeStation 2000i ?
"Eddie: In Fixed Ratio Trading my understanding is that position size increases as a function of profit and loss. Can you walk us through the formula that you use to calculate that relationship?
Ryan: The formula that I use is to look at the largest expected drawdown. Ultimately, that's what a lot of my planning revolves around. The number one goal is survival. You've got to look at what you're largest expected drawdown is going to be. I can measure how aggressive or conservative I'm going to be. If I expect my strategy to go to a $10,000 drawdown, then I'm going to use $5,000 as my fixed ratio number in that I'll increase my position size by 1 one contract when I have a $5000 profit in the account. If I'm more aggressive, then I'm going to have a number that is lower than that. For example, I will increase position size when I have $4000 profit in the account. If I'm going to be more conservative, I'm going to go above that number.
Eddie: As the account grows would you use that same level of profit increment as the account grows?
Ryan: If you settle on a $5,000 level in order to increase from 1 to 2 contracts. Since we're using a fixed ratio of $5,000 per contract, and you're now trading two contracts, you'd have to go 2 times the $5,000 and that's how much profit you'll have to have in order to increase your position size to three contracts.. So now you'll need and additional $10,000 in new profits to go to three contracts. Then you'll need an additional $15,000 in profits on top of that in order to go to four contracts. Then you'll need $15,000 in order to go to four contracts. That is pretty much the fixed ratio of the equation. So to answer your question about whether you want to make adjustments, you don't want to do that until you have a very, very solid understand of how this all works and what the consequence of these changes are.
Eddie: I heard a story of a trader who approached you and who'd made a lot of money. And that he wanted you to help him add money management to his trading plan. And you said some sort of intriguing reply. Do you know what I'm referring to?
Ryan: Yeah. Someone came to me, read all of my material and then began trading without using any kind money management method. About a year later, he called me and told me that he was satisfied that his trading system worked. He had made $70,000 over the past year and now he wanted to start using money management. I was kind of shocked because based on the numbers that he gave me and my assessment of how his system performed, I determined that had he used my system of money management from the beginning, he would have made instead of $70,000, almost $700,000 by applying the money management from the beginning. This is something I hear a lot. People focus on getting their systems right first. And then money management is an afterthought. That is a wrong foundation that there working from.
Eddie: Let's take a step back. Let's walk through how the use of Fixed Ratio enables a trading account to grow, given that you also have a good trading system.
Ryan: We all know that a good system goes through winning streaks. The key is to take advantage of those winning streaks. During winning streaks Fixed Ratio trading allows you to be aggressive. But during a losing streak, you're taking away risk by lowering the position size. Let me give you an example. A few years back I turned $15,000 into $107,000 in 90 days. That was in a trading contest in which I daytraded the S&Ps. We basically were through a very nice winning streak in this system I was trading. Without money management, if I had just stuck with one contract the entire time, my $15,000 would have grown to something like $35,000. But because I applied Fixed Ratio money management I was able to capitalize off the winning streaks that occurred. Now during the rest of the year, my system did absolutely nothing! This occurred in April 2000, when the market tanked and the dynamics began to change. But my money management system can cut the number of contracts and protect profits."
"Eddie: In Fixed Ratio Trading my understanding is that position size increases as a function of profit and loss. Can you walk us through the formula that you use to calculate that relationship?
Ryan: The formula that I use is to look at the largest expected drawdown. Ultimately, that's what a lot of my planning revolves around. The number one goal is survival. You've got to look at what you're largest expected drawdown is going to be. I can measure how aggressive or conservative I'm going to be. If I expect my strategy to go to a $10,000 drawdown, then I'm going to use $5,000 as my fixed ratio number in that I'll increase my position size by 1 one contract when I have a $5000 profit in the account. If I'm more aggressive, then I'm going to have a number that is lower than that. For example, I will increase position size when I have $4000 profit in the account. If I'm going to be more conservative, I'm going to go above that number.
Eddie: As the account grows would you use that same level of profit increment as the account grows?
Ryan: If you settle on a $5,000 level in order to increase from 1 to 2 contracts. Since we're using a fixed ratio of $5,000 per contract, and you're now trading two contracts, you'd have to go 2 times the $5,000 and that's how much profit you'll have to have in order to increase your position size to three contracts.. So now you'll need and additional $10,000 in new profits to go to three contracts. Then you'll need an additional $15,000 in profits on top of that in order to go to four contracts. Then you'll need $15,000 in order to go to four contracts. That is pretty much the fixed ratio of the equation. So to answer your question about whether you want to make adjustments, you don't want to do that until you have a very, very solid understand of how this all works and what the consequence of these changes are.
Eddie: I heard a story of a trader who approached you and who'd made a lot of money. And that he wanted you to help him add money management to his trading plan. And you said some sort of intriguing reply. Do you know what I'm referring to?
Ryan: Yeah. Someone came to me, read all of my material and then began trading without using any kind money management method. About a year later, he called me and told me that he was satisfied that his trading system worked. He had made $70,000 over the past year and now he wanted to start using money management. I was kind of shocked because based on the numbers that he gave me and my assessment of how his system performed, I determined that had he used my system of money management from the beginning, he would have made instead of $70,000, almost $700,000 by applying the money management from the beginning. This is something I hear a lot. People focus on getting their systems right first. And then money management is an afterthought. That is a wrong foundation that there working from.
Eddie: Let's take a step back. Let's walk through how the use of Fixed Ratio enables a trading account to grow, given that you also have a good trading system.
Ryan: We all know that a good system goes through winning streaks. The key is to take advantage of those winning streaks. During winning streaks Fixed Ratio trading allows you to be aggressive. But during a losing streak, you're taking away risk by lowering the position size. Let me give you an example. A few years back I turned $15,000 into $107,000 in 90 days. That was in a trading contest in which I daytraded the S&Ps. We basically were through a very nice winning streak in this system I was trading. Without money management, if I had just stuck with one contract the entire time, my $15,000 would have grown to something like $35,000. But because I applied Fixed Ratio money management I was able to capitalize off the winning streaks that occurred. Now during the rest of the year, my system did absolutely nothing! This occurred in April 2000, when the market tanked and the dynamics began to change. But my money management system can cut the number of contracts and protect profits."