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Generalized Fixed Ratio MM

  • #41
  • May 29, 2009 9:03pm May 29, 2009 9:03pm
Thank you, kore, for starting this thread as money management is what I'm obsessed with at the moment: trying to find the best MM approach to use with my preferred trading method (Elliott Wave Analysis).

I subscribe to the idea (with which capitalist88 also agrees) that the smaller one's account is, the bigger the risk one could take and vice versa. And I've indeed been using the fixed fractional position-sizing strategy thus far due to its relative simplicity.

I will try out your fixed ratio formula as well.

(If there are other elliotticians reading this thread -- and if kore would not mind -- can you tell me what MM method works best for you? Please PM me otherwise, thanks!)
Amor Fati--F. Nietzsche
  • #42
  • May 29, 2009 9:06pm May 29, 2009 9:06pm
Quoting mjotic
I'm really glad to see more in depth analysis of position sizing.

Markets change from sideways periods to trending periods and from low volatility to high volatility and all permutations of these scenarios.

I like the idea of increased risk during early stages of a small account and scaling out as time goes on and the account grows....
I try to deal with this by having different trading methods that trade in different market conditions, and/or only during certain times of the day, then size positions based on expectancy of each method.

Is there a better way?
  • #43
  • May 29, 2009 9:10pm May 29, 2009 9:10pm
Quoting doji
(If there are other elliotticians reading this thread -- and if kore would not mind -- can you tell me what MM method works best for you? Please PM me otherwise, thanks!)
I don't mind at all.

I am interested in hearing other methods on scaling risk back as equity grows... mikkom suggested one, there must be others...
  • #44
  • May 30, 2009 2:56am May 30, 2009 2:56am
Quoting kore
I don't mind at all.

I am interested in hearing other methods on scaling risk back as equity grows... mikkom suggested one, there must be others...
Well what I've been planning (assuming my account ever gets to the point where it's meaningful and I can maintain a positive expectancy) is to reduce risk through withdrawls of 1/2 of the profits at some predetermined target. So if I turn a $10,000 account into an $11,000 account, I would take $500 out and put it into some conservative income fund or something. Then I would continue working to increase the new balance of $10,500 and so on...
  • #45
  • May 31, 2009 1:43am May 31, 2009 1:43am
Kore, can you please illustrate your "hybrid" MM approach using, say, a 10K USD starting equity?

Just trying to make sure I understand it correctly.

Thanks again.
Amor Fati--F. Nietzsche
  • #46
  • May 31, 2009 10:00am May 31, 2009 10:00am
Quoting doji
Kore, can you please illustrate your "hybrid" MM approach using, say, a 10K USD starting equity?

Just trying to make sure I understand it correctly.

Thanks again.
Sure, here are two examples using the "shifted power" formula, with balance growing from $10,000 to $50,000 (notice at $30k equity, the risk is the same in both examples).

1. High risk, low delta

Target Balance = $5000
Target Leverage = 20

Equity : Base lots
$10k : 1.56 lots
$15k : 2.00 lots
$20k : 2.37 lots
$25k : 2.70 lots
$30k : 3.00 lots
$35k : 3.27 lots
$40k : 3.53 lots
$45k : 3.77 lots
$50k : 4.00 lots

2. Medium risk, high delta

Target Balance: $30,000
Target Leverage: 10

$10k : 1.37 lots
$15k : 1.85 lots
$20k : 2.27 lots
$25k : 2.65 lots
$30k : 3.00 lots
$35k : 3.32 lots
$40k : 3.62 lots
$45k : 3.91 lots
$50k : 4.18 lots

Notice in example 1, your initial risk is higher, but decreases more rapidly, due to the lower delta (target balance); in example 2 risk decreases more slowly.

Also remember to adjust the base lots according to the currency pair you're trading and the expectancy of each of your trading methods. Since most trading methods have an expectancy of less than 1.0, actual lots traded would be less than those listed above. I am wary of trading any method that has less than 0.5 expectancy, and will not trade if less than 0.25.
  • #47
  • Edited 7:39pm May 31, 2009 7:32pm | Edited 7:39pm
Ok, since sometimes a picture speaks a thousand words, I plotted some test data in excel to show some of the things I've been talking about.

For account balance from $10,000 to $200,000, I have plotted three graphs each for Fixed Fraction, Fixed Ratio and Shifted Power.

The first graph shows position size relative to the account balance.

The second graph shows "work ratio" relative to account balance; this is "how hard each dollar has to work to increase the position size."

The third graph shows risk relative to the account balance.

You'll notice that fixed ratio is not so fixed when you are close to your starting balance, but corrects itself after you pass (starting balance + delta).

Attempting to eliminate this and other inconsistencies resulted in the shifted power formula.

Some notes on the three images:

1. Fixed Fraction has a flat risk line because you are always risking the same amount. But the work graph shows how much more your "early money" has to work to increase position size.

2. Fixed ratio has an (almost) flat work line because it strives for "equal achievement" of each dollar relative to how quickly position size is increased. This graph was plotted with starting balance $10,000 and delta $5,000.

3. Shifted power is similar to fixed ratio except it can handle values below the starting balance, doesn't have the initial "glitch", and has a work graph somewhere between FF and FR (but closer to FR). This was plotted with Target Balance $20,000 and target leverage 10.
Attached Image(s) (click to enlarge)
Click to Enlarge Name: fixed-fraction-curves.png Size: 27 KB
Click to Enlarge Name: fixed-ratio-curves.png Size: 29 KB
Click to Enlarge Name: shifted-power-curves.png Size: 29 KB
  • #48
  • Jun 2, 2009 11:11pm Jun 2, 2009 11:11pm
Thanks for the graphs, kore.

They certainly made things much clearer in terms of how the three MM approaches differ.
Amor Fati--F. Nietzsche
  • #49
  • Jun 3, 2009 9:19am Jun 3, 2009 9:19am
Quoting capitalist88
Well what I've been planning (assuming my account ever gets to the point where it's meaningful and I can maintain a positive expectancy) is to reduce risk through withdrawls of 1/2 of the profits at some predetermined target. So if I turn a $10,000 account into an $11,000 account, I would take $500 out and put it into some conservative income fund or something. Then I would continue working to increase the new balance of $10,500 and so on...
Cap's post had me thinking...

Part of my goal for my trading account is to one day be able to live comfortably off the returns. Many people have similar goals, I think.

Also as we grow into higher net-worth individuals, it becomes prudent to move capital into lower risk channels, perhaps real estate, long-term business investments, high interest offshore bank accounts, managed funds, etc -- or a mix of these and others.

Originally I had been thinking like in the above quote, that once my trading account reaches a certain size (perhaps $60k), I would start regularly withdrawing 50% of profits for "living" and longer term investments.

But now I'm thinking it would be better to work this explicitly into my MM.

I'm thinking this curve should have an "S" shape, staying close to 0 until equity grows to a certain level, then rising more or less diagonally for a while, then flattening out again towards 100% (but never reaching 100%) as the account matures.

Another possibility is to mimic mikkom's MM, define a start and end point for ramping up the withdrawals, and simply plot a straight line between these two points.

Anyone have any thoughts, or doing something similar already? I have some time to think it out as I wasn't planning any withdrawals until the account reaches its first MM target...
  • #50
  • Jun 3, 2009 12:51pm Jun 3, 2009 12:51pm
Quoting kore
Also as we grow into higher net-worth individuals, it becomes prudent to move capital into lower risk channels, perhaps real estate, long-term business investments, high interest offshore bank accounts, managed funds, etc -- or a mix of these and others.
In the past, this was indeed a prudent thing to do, but recently... ?

It has been argued that - as always assuming a positive expectancy system or systems over time - it is both more profitable and less risky to trade 25% of a large account very aggressivley, with the balance in T Bills, than trade all of it more conservatively : the "aggressive 25%" fairly quickly overtakes the more conservative alternative. Imagine how many blown-up hedge funds wish they'd taken this option...
  • #51
  • Jun 3, 2009 1:08pm Jun 3, 2009 1:08pm
Quoting kore
Anyone have any thoughts, or doing something similar already? I have some time to think it out as I wasn't planning any withdrawals until the account reaches its first MM target...
I also have one other protection mechanism if you are interested - when my account will hit a very large amount (let's say a million euros) I have a maximum cap on r% calculation. This means that when my account grows to over X (million in this case), all percentages from account balance X up are calculated based on X, not actual balance. This makes sure that when my account grows to that amount, my risk will go lower every time the account grows but growth will remain fixed.
  • #52
  • Nov 30, 2012 1:05pm Nov 30, 2012 1:05pm
Very interesting this thread about this great MM from Ryan Jones. I also worry much about the management of my capital and so I have been searching for, search on this subject. I thank the Kore for this post. Now, I'm also searching an indicator of Money Management based on Ryan Jones, but to no avail so far.
Kore, have you ever thought about creating a MT4 indicator based on this strategy? If you do not believe it is a good idea and colleagues of this post are interested to create one will be a breakthrough, at least for me.


I thank the Kore and all who participate in this post.


Even more.
Invest in creating their EAs, because one day you need one!
  • #53
  • Sep 21, 2014 11:20pm Sep 21, 2014 11:20pm
Most traders only interesting about Entry & Exit
That's why this thread short-lived...
i worshipped... Momentum
  • #54
  • Jan 12, 2016 9:52pm Jan 12, 2016 9:52pm
Quoting RockRobb
Most traders only interesting about Entry & Exit That's why this thread short-lived...
thread with wonderful info, short-lived. renewal just for you guys.
  • #55
  • Last Post: Edited 11:53am Dec 30, 2020 11:18am | Edited 11:53am
Very insightful thread, I am dig it up. Thank you Kore!
I have two questions:
- my account is USD and I trade EURCHF, should I add CHF pair or just use the EUR lots?
- the Base Leverage: with my broker I use a leverage of 1:500 then I should indicate 500?
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