Traders' Roundtable

Hi All,

I've read some of Ryan Jones' ideas regarding money management. He seems particularly critical of Fixed Fractional ideas, such as using 2% of account value, etc.

I'm not sure I'm understanding his proposal, as it seems very risky early on, yet more conservative as the account grows.

I'd like to hear other's thoughts and analysis on what he's trying to say, and any experiences anyone has ahd using his ideas.

Thanks for any responses!

IMO and many others (there is much discussion 2 yrs back on omega group threads with good testing to justify the opinions) Ryan is just selling books. If you can trade you trade. If not .....

The best money management for normal players is to bet a fixed fraction of your equity on every trade. You can add to variations that may pay off:
- the ryan jones bet heavy when new approach (try that if u started 2 years ago just for fun).
- the "bet harder on the markets money" until the end of the trading period.

I suggest keeping it simple.

Then the next variation is how you calculate your equity. Do you use your closed trade equity, your open trade equity or a cleverer version which is the equity protected by stops. I think the last one is intellectually most attractive but like most people I end up using my Open Trade Equity because that is what I get on my report each night so its easiest.

There are also other discussions about all of these aspects on this site with more depth and some opposing opinions esp wrt the value of RJ. Tests and his inaccuracies in his book suggest to me that you should keep it simple.

John

Kiwi wrote:If you can trade you trade. If not .....

I think that's largely true, however, there are exceptions.

Toby Crable told me that his book got his trading career launched. He recommended writing a book as a way to get noticed.

Absolutely. I would be more than pleased to see that Ryan had joined the exceptions.

The account of anyone who traded a full size portfolio with aberration, synergy or ryan's system in the recent past using his start up rules would be interesting reading I suspect. And my sympathy to anyone who did exactly that 12 months ago (really)

Kiwi, could you expand on this?

I'm not familiar with Aberration et al. money management system, so I'm curious to know where the holes in the logic are.

Cheers,
Doug

Greetings all,

I am curious if VeriTrader 1.5 includes the fixed radio model? I know conventional wisdom says use a fixed %, which can be modified and safeguarded in many ways as discussed on this board, the Turtle System via c.f. {thanks!}, and other places.

However, I wonder if anyone here has done exhaustive studies with Fixed Ratio over a large diversified portfolio of futures and systems. It too could be modified in many ways. Adding in stages, Profit target levels, determining delta on a market individual basis but using portfolio equity to base next trade size. Faster rate of decrease durring drawdowns...etc etc etc

I am in the early stages of doing this work myself. But would appreciate feedback from anyone who has done extensive apple to apple testing vs other sizing methods. I would love to simplify my life by ruling F.R. out of consideration. But before throwing it away, in my mind, it deserves an honest and robust appraisal.

The ability to run such tests in 1.5 would answer these questions undoubtedly... So my brethren...what say you???

Redrock

Hiramhon,




Yes, I am going about the testing myself. You do not need to explain the reasons for doing my own work.

My intent was to derive possible valuable ideas I had not thought of. Random input... As I am in the early phase of testing it would be easy to incorporate new ideas at this point. This was my purpose in posting. Not to be handed answers on a platter. I am not trying to be adversarial in my reply. Just clarifying my intent. I am quite new to this group. (Although quite old to the markets…) And new to learning the features of vt1.5 So thank you for pointing out that ROD is an included element. However, i cannot reasonably conclude anything by that in regards to what features of FRatio may or may not be included. And especially so in 2.0, which has not been released yet. Although I presume your implication is that F-ratio is included and its concepts may be thoroughly explored. However I am not one to jump to such conclusions. Also, before I go about writing an excel sheet, wanted to explore simply purchasing 1.5 and doing the work on this exciting new platform.

So again… Seeking intillegent feedback from those who have exhaustively tested out FRatio. Such as… If it is vulnerable to increasing position size early on. Thus exposing a large portfolio to greater risks than % of account would have. And it does… Some other questions pop to mind. If one makes it past this danger point of early growth… What are relative risks vs the rewards? In this case, it is subjective whether the faster potential growth outweighs the greater risks. This is clearly a technique for growing a small account faster. With a large account, obviously fixed% etc is superior. This raises another thought. What about trading a portfolio of such smaller “Kamikazeâ€

I have been testing Fixed Ratio and some variations of Fixed Fractional, being Tharp's %Risk and %Volatility.

One observation: FR (as has been said earlier) puts most of the risk up front, giving the bulk of the risk when there is less to lose - the curve tapers off as the account grows. The curve for most versions of FF do not display this tendancy so noticably.

Not sure what to conclude from this - is the greater early risk worthwhile as a kind of 'kick start' for a smaller account, then maybe change to FF past a certain $ equity point?

Roscoe,

Another version of that question might be: "is it a good recommendation that you (say) double your risk when you know relatively little about what you are doing and are going to experience your own mistakes as well as surprises about slippage and the markets?"

John

PS. My father always told me that this was a great way to go out of business - but then he didnt like gambling.

Ryan Jones - the final frontier in snakeoil!!
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Ineteresting Kiwi, and how much did want to take from you for his courses?

Van Tharp, in one of his recent 'Market Mastery' newsletters has a large section about fixed fractional betsizing. The system used is not exactly a pure FF formula, and the stated purpose of using this style of position sizing is to allow smaller accounts to be able to trade in the markets, and increase the size traded at a reasonable rate.

To give a little detail about the system, it starts with FF and adjusts it down for capital, so as the account grows, you will still add contracts, but at an ever decreasing rate. So for the first trade, you might be risking like 8% (yep!) of account value, but when you add the next contract, you will only be risking 6%, and so on. These are rough, not exact figures - I don't have the material in front of me.

Note this allows you to trade in markets that you couldn't touch with small accounts, and trys to reduce bet size as quick as possible. If I remember correctly, as the account grew, the bet size ends up converging with a standard % of equity.

Van states he was really surprised at the performance of this model - that it actually worked much better than he ever expected in terms of risk, and recommended that traders with smaller accounts take a good look at it.

My impression - it seemed pretty good.


Redrock, if you are thinking about FF and have a small account, this article is a must read. I created a spreadsheet with a modified version of this PS system that took into account the ATR in dollars and a few other things so it wasn't as much of a guess about how many contracts to start trading in each market, and how fast to scale down. If you are interested, I could post it.

Mike S wrote:To give a little detail about the system, it starts with FF and adjusts it down for capital, so as the account grows, you will still add contracts, but at an ever decreasing rate. So for the first trade, you might be risking like 8% (yep!) of account value, but when you add the next contract, you will only be risking 6%, and so on. These are rough, not exact figures - I don't have the material in front of me.

Note this allows you to trade in markets that you couldn't touch with small accounts, and trys to reduce bet size as quick as possible. If I remember correctly, as the account grew, the bet size ends up converging with a standard % of equity.

Sounds like the betsize model that Mark Johnson developed long time ago.

http://www.mjohnson.com/archive/assets/betsizMJ.zip

TK,

It does look similar, but slightly different. MJs formula appears to start with a low betsize and work higher, while the method Van tested started high and worked lower. thanks for pointing it out.

I would like to post the method here, along with my mods, but I want to make sure I am not violating the rules of the forum. This method was introduced to me in Vans 'Market Mastery' newsletter, so it is not a commercial system, however, MM is quite expensive. I like this forum and don't want to lose access to it.

Standing of the shoulders of giants - thanks again MJ!

Thats what I get for not spending enough time to look at everything....sorry.

Mike,

Even though Van apparently supported the "high risk small/early account" strategy, high bet size still equals high risk. Such models seem to be a great way for new entrants to join the futures market losers.

This makes me wonder about his testing if he was surprised by how well it worked. Van is a psychologist and trainer not a statistician or a financial wizard so it would be worth looking at how he came to his conclusions.

Can you refer us to Van's paper so we can have a look at his assumptions and methodology? It might be interesting just to apply it to a couple of well known systems over data from 2000/2001 to now.

John

John,

For some discretionary and/or hybrid traders, it would be just what the doctor ordered... I agree, for the systematic trendfollower it equals high risk ...

Criticisms:

1. Equal number of contracts: The proportions of different types of contracts that is appropriate to trade may be found through optimization (not strictly by solving from historic data, because this over allocates to historically good curves, and underallocates to poor curves-but by doing this then correcting the allocation). The answer is not to trade an equal number of contracts.
2. Fixed ratio: Fixed fractions of your portfolio should be used at all times given that your risk-aversion is the same (and volatility is fixed). However, it is logical to assume (as Jones has) that you become more risk-averse over time. Nevertheless, Jones's fixed ratio methodology is probably not the correct decision, as it is incrediably unlikely that your risk aversion would result in the optimal "money management" algorithm being fixed ratio.

I never heard back from IITM about the Market Master newsletter. I will try again soon, with a direct phone call this time and keep you all updated with the results.

Finally heard back from IITM.

They said they would allow a short, couple of paragraphs sized description. I did this earlier.

However, they also said they would sell the two issues containing this information at a 50% discount, so it would be $19.99 for both issues. There are about 15 pages of information and charts. I'll post a direct link in a few days when I recieve it from them, in the appropriate forum section.

There is one idea I didnt mention in my earlier posts. Van seems to believe the reason this system performs much better than he expected is that the diversification benefits of trading more markets partially offsets the much higher risk per trade taken by this system. This position sizing system would allow trading in markets when with other systems, those markets would be too risky to trade. This could probably be tested in 2.0 for someone interested.


Is it worth it? Well, $20 is not that much, and if you are looking for inspiration, its not that much. I found the material interesting, and was surprised at the results. I would probably spring for it if I were trading a small account. The system is similar to M. Johnsons system, but with a more jagged risk/trade curve. However, I found the system as presented slightly flawed, as there was no way stated in the material to equalize the initial risk taken in different markets. It seemed like you just chose a number that would make the risk roughly equal, or just start with 1 lots. The spreadsheet I mentioned in an earlier post attempted to correct for this omission. If you buy the MM newsletters, I'll share this worksheet with you.

For V. Tharp fans, it's probably worth the cost just to read Van's shock at the performance of the system. He's really big on low risk per trade, and recommends against FF position sizing all the time. This system is a high risk per trade, FF position sizing that seems to work ok, and Van is completely flabbergasted!