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A few years ago, I read Ryan's book and ran extensive simulations on an Excel spreadsheet using a random number generator and basic trading system statistic, (eg. %Wins, %Loss, etc.). I used it on Stocks however. What Steve said below is what I found. It will really get a small account moving, one way or another. After the account grows in size (and not the other way), the leverage decreases significantly until there is almost none. This is pretty easy to run on a spreadsheet.
I like the deterministic methods of Optimal F, however, it is difficult and cumbersome to work with for the nightly chore of managing a porfolio. If I had a huge portfolio and a staff of techies, then maybe it could make it work.
I'm really looking forward to getting the margin feature working in Amibroker to run some portfolio simulations. I think this will be very enlightening.
Kevin Campbell
In a message dated 10/30/03 2:11:38 PM Central Standard Time, kernish@xxxxxxxxxxx writes:
Mark,
I looked through my emails for the last year and came up with the following message. After reading his book, I asked for opinions from my research associates and here's a response from a large money manager (who really trades hundreds of minis at a whack):
"I read "The Trading Game" last weekend, and I was NOT impressed. First off, I find it remarkable that people can get so much attention for the radical concept of position sizing. I mean, are there that many people out there who don't understand that you'll make more profits (assuming a positive expectation) if you trade multiple contracts!? Jones talks like scaling your size up is a huge revelation. But ignoring that, I think his Fixed Ratio approach is bogus. IMO his entire premise is flawed: he looks at the per-contract profit it takes to move from 1 to 2 contracts, and he says that it should take the same per-contract profit to move from X to X+1 contracts. I.e. if you need $10k profit to move from 1 to 2 contracts, you should need $10k profit **per contract** to move from 100 to 101. You'd need $1M total profit to increase by 1 contract. I think this is flawed for 2 reasons: first, it relies much too heavily on the size of the contract. The entire leverage structure he computes would be totally different for, say, $250 SP's vs. $500 SP's. But the big flaw is his use of additive growth instead of percentage growth. Moving from 1 contract to 2 isn't equivalent to moving from 100 to 101; it's like moving from 100 to 200! I think simple fixed-fractional approaches handle the position sizing much more logically. What really honks me off, though, is the way he cooks the books to make his approach look good. Fundamentally what he's doing is using very high leverage when the account is small, and backing off as the account gets big. This has the advantage that it gets the small account off the ground & running quickly. But it also exposes you to a lot more risk early on. He uses all kinds of examples to show how the FR approach can take a $X per contract loss with a much lower drawdown than FF -- but he constructs his examples so that drawdown happens AFTER he's scaled back the leverage. He conveniently neglects to mention that the FR approach would BANKRUPT you if that same per-contract loss happened early on with higher leverage. Add to that a host of logical and math errors, and I was SERIOUSLY underwhelmed. My advice would be to use a basic Fixed Fractional approach. Decide what leverage works for you, taking into account your risk tolerance, the Optimal F of your system (make sure you trade far UNDER the "optimal" F value), etc, and just risk a constant percentage on each trade. As your account grows, you may decide to back off on the leverage a bit. You can do all that without the Fixed Ratio complexities."
"Extensively tested"? Isn't that what Ryan did with his own account when he blew it up? Oh, maybe he sell books on fixed ratio and then goes out and trades with a different style. Either way, with or without FR, he did "blow up". And as John Candy used to say on SCTV: "Wow, he blew up real good."
Take care,
Steve
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