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This has been covered before. As is often the case with these "experts,"
they take a really simple concept, find a way to make it seem
complicated, and then sell a book "explaining" the concept. For those
who don't feel like wading through the books:
Ralph Vince, fixed fractional
contracts = constant * account_size
Ryan Jones, fixed ratio
contracts = constant * squareroot(account_size)
Rewriting those formulas slightly:
Vince: contracts = constant * power(account_size, 1)
Jones: contracts = constant * power(account_size, .5)
There you have it. The big difference is one uses a power of 1 and the
other uses a power of .5.
But hey! Maybe it's better to split the difference! I hereby proclaim
that my secret power of 0.7 is the key to the universe. I'm going to
hire Richard Josselin to go around the country teaching people that the
secret to wealth is my formula:
QQQQ (four-Q) Ratio: contracts = constant * power(account_size, .7)
Disciples who master the beginners course will be eligible for my
advanced course (for only $2,999 paid in advance) where they learn that
.7 can be changed to something else. Flash (lightbulb comes on) we also
need to consider the per-contract risk (max possible loss) of each trade
in the formula.
Four-Q Super Ratio:
contracts = (constant/risk) * power(account_size, power_factor)
Advance disciples will be let in on the ultimate secret (for only
$29,999 paid in advance.). Flash (solar flare) we should define our max
risk by using an adaptive volatility-based disaster stop.
Four-Q Ultimate Formulas:
risk = disaster_stop = constant * volatility
contracts = (constant2/volatility) * power(account_size, power_factor)
And there you have our ultimate position sizing formula. The rare
students who master it will have discovered the Mother Lode and shall
hereinafter be refered to, in hushed tones, as Mother Four-Qers. :-)
Seriously though, that last one ain't bad. Assuming you use a volatility
based stop, you can optimize for the terms "constant," "constant2" and
"power_factor", as well as how you calculate the volatility, to find
something that works pretty well for your particular system, goals and
risk tolerance.
The End
Thank You
Send Money
Lots of it
--
Dennis
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