Ryan Jones on his Fixed Fractional strategy.......

Discussions about Money Management and Risk Control.
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PTCM
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Ryan Jones on his Fixed Fractional strategy.......

Post by PTCM » 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."

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Post by sluggo » Wed Nov 09, 2005 1:54 am

Maybe it's possible to program the Fixed Ratio idea in computer software? If so then you could run the software yourself, try it out for yourself, and see it work (or fail to work!) with your own eyes.

I suspect that a sufficiently motivated person could write this software (or pay a consultant to have it written) for Wealth Lab, or Trading Blox Builder, or Trading Recipes, or Quant Studio. But perhaps I suspect wrongly. Perhaps it CANNOT be written in computer software and thus it CANNOT be tested. If nobody can backtest it in the computer, would that be a welcome, or unwelcome, development?

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Post by AFJ Garner » Wed Nov 09, 2005 2:32 am

While entirelyagreeing with Sluggo's sentiments, I have to add that if you search on www.traderclub.com under "Ryan Jones" you will in all probability find coding of what you seek in one or other language which is "human readable" enough for you to be able to get the idea and to then program it in another language.

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Post by damian » Wed Nov 09, 2005 6:49 am

There were some good discussions on that old board. To save you the search hassle:
http://traderclub.com/discus/messages/1 ... 20021151am

And to enjoy another good discussion on the topic, with a funny ending:
http://www.traders2traders.com/papers/Ryan.Jones.MM.htm

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Post by PTCM » Wed Nov 09, 2005 10:26 pm

damian wrote:There were some good discussions on that old board. To save you the search hassle:
http://traderclub.com/discus/messages/1 ... 20021151am

And to enjoy another good discussion on the topic, with a funny ending:
http://www.traders2traders.com/papers/Ryan.Jones.MM.htm
damian,

thanks a lot. Your links are very helpful incomparison to the worthless philosophy on back-testings.

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Post by dave3076 » Thu Jan 05, 2006 10:40 am

If you use fixed ratio position sizing on a portfolio, how do you make an explosive move in oats pay for the losses on the yen or orange juice? In other words, If you`re trading a portfolio, then you must have a way to make all markets "equal". This is a much underestimated part of the benefits of atr/% bet sizing.

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Re: Fixed Ratio and Equalizing Risk

Post by PaulZ » Thu Jan 05, 2006 12:01 pm

daveyboy5 wrote:If you use fixed ratio position sizing on a portfolio, how do you make an explosive move in oats pay for the losses on the yen or orange juice? In other words, If you`re trading a portfolio, then you must have a way to make all markets "equal". This is a much underestimated part of the benefits of atr/% bet sizing.
Fixed Ratio assumes all markets are "equal" even though we know they aren't. By equal, I mean each market trades the same number of contracts based on profit and delta. By "we know they aren't" I mean that trading 2 SP and 2 C, a huge upmove in C won't do much to make up for a downmove in SP. There is a wrinkle on FR, suggested by Ryan Jones, in his book "The Trading Game" which is to weight the delta differently for each market. So if your largest SP drawdown is 5 times your largest C drawdown you can assign a more aggressive delta to C and a less aggressive delta to SP.

What I don't care for in FR is that the primary determinant of risk, reflected in Delta, is the largest historical drawdown. Personally, I need to understand how much is being risked on a particular trade and I need to be able to manage THAT kind of risk. The risk on a particular trade is equal to, for long trades only, (EntryPrice - StopPrice)*NumContracts*BigPointValue.

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Post by dave3076 » Thu Jan 05, 2006 4:40 pm

my point exactly! but to go through a trend following system that relies heavily on the power of diversification, searching for each commodities largest drawdown as a guide to position sizing is not my idea of ideal! Drawdowns evolve and revolve around new market conditions.....and those very same new market conditions are exactly why using atr in the traditional "turtle" fashion are exactly what makes it a perfect sizing strategy......it constantly evolves with new market conditions and in my opinion, always will.

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Fixed Ratio Vs. Fixed Fraction

Post by Christian Smart » Sun Jan 08, 2006 9:39 pm

I personally am not a big fan of fixed-ratio position sizing either. Just for fun, I thought it would be an interesting exercise to update Mark Johnson's test in Trading Recipes. Attached is a comparison chart using the same 89-13 channel breakout system, with the same portfolio that Mark Johnson used. The only differences are the start and end dates. The dfference is amazing, and it's not just a matter of the fixed ratio algorithm not risking as much as much as the fixed fraction algorithm - the drawdown with fixed ratio for this test is much higher than for fixed fraction.
Attachments
FR vs FF update.jpg
FR vs FF update.jpg (82.24 KiB) Viewed 15139 times

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Post by Roscoe » Sun Jan 08, 2006 11:57 pm

My own testing of Fixed Ratio to date shows much the same thing as Christian’s chart – a much-reduced equity curve compared to any flavor of Fixed Fractional. The most promising variation of FR is, as PaulZ states, the weighted version where the delta is weighted for each market.

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Ryan Jones Money Management Course

Post by Nussgipfel » Thu Jul 13, 2006 7:04 am

Just wonder if anyone studied Ryan's Money Management Course offered on his web-site for US $ 995.00 and if he/she would recommand it. I did not find any comments on the course in the forum but I am aware of his book and his contribution to this topic.

Thanks.

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Post by BARLI » Thu Jul 13, 2006 10:42 pm

people who sell their stuff are usually not traders or trade badly, I do not recommend you buying anything over 200$. Ralph Vince is considered to be a super star in money management, and you can buy his books on amazon for 40-50$ and cheaper than that on Ebay. good luck!

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Re: Ryan Jones on his Fixed Fractional strategy.......

Post by jtrade » Mon Sep 18, 2006 11:54 am

PTCM wrote:Ryan: ...Let me give you an example. A few years back I turned $15,000 into $107,000 in 90 days."
Just saw this quote of Ryan's, which I have seen elsewhere. What Ryan always fails to relate is that this account, which was a real money account, went back to $16k over the following 60 days or so.

So much for fixed ratio MM - I agree with Christian, Roscoe & BARLI in this regard. I personally use 2% Fixed Fractional, but am researching ways of being more aggressive : I like this idea, which attempts to leverage up winning streaks, from an apparently successful forex trader :
Now if you want to know how I set my trade size... this is a description of the method I use, which I normally refer to as Variable Fractional Percent (VFP)
If you want another money management idea that is very responsive to performance, yet doesn't make you make too hard decisions up front try this:

Firstly you need to know your daily Net Asset Value (NAV) gain or loss in percent.

Start trading at a conservative 5% FFP (or whatever suits you). But instead of using a Fixed Fractional percent, you use a range say 2%-25%. Move up and down the scale by adding or subtracting half of your last daily NAV percentage.

For example start at 5% FFP

Next day profit on trades = 1.5%
Therefore your next FFP = 5 + (1.5 * 0.5 ) = 5.75%

Say you then lose 3%
Next FFP = 5.75 + (-3 * 0.5) = 4.25%

Obviously use ranges and a daily factor (here 50%) that suits you, but you'll find this method really rewards good methods, and lightens up very quickly on bad.

I use it myself, and find it very sound.
J.

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