|
PureBytes Links
Trading Reference Links
|
> I am hesitant to jump into this given the negative posts. I am
> especially hesitant to jump in because it involves debating with
> Gary Fritz, and he is not a person I would choose to debate with ...
I have this image of tiny Bob coming after Big Bad Gary, swinging a
stone around in a sling. :-)
I will preface my response to Bob by saying I read the book almost a
year ago, and wrote the comments I posted nearly that long ago. At
the time I wrote them my arguments were clear in my mind. After this
long they're not as clear, so I won't be able to defend them as well
as I could have last year.
I will also add that several people I respect a lot strongly agreed
with my opinions of Jones' book and methods.
> >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.
>
> Yes, but you are talking about position sizing changing from 1
> contract to 100 contracts. That is a huge increase.
The size isn't the issue; it was reductio ad absurdum. Jones says
you should always require the same gain *per contract* when going
from X to X+1 contracts, whether X is 1, 2, 5, 10, or 100. That
means you require increasingly large profits per contract to increase
your position size by 1. Eventually the required profit gets
absurdly large, which is why he says you should switch to plain old
fixed-fractional when your account gets big enough.
On the flip side, it tends to mean you need very *small* profits to
increase size when your account is small, which causes a lot of the
risk.
> I think it needs to be clear that it is the trader who makes this
> initial decision, not the Fixed Ratio strategy.
If I remember correctly, Jones' book has a formula for determining
it, and I disagreed with the logic of that too, but I don't remember
the details.
> So, the trader decides that given the risk dynamics of his
> portfolio, he chooses $10K profit as the amount for when he wants
> to add a second contract. In other words to add a single
> additional contract. This is an initial decision the trader makes
> based upon the size of his portfolio, how aggressive he wants to
> be, etc..
>
> If $10K is the tolerable risk for 1 contract, then for 100
> contracts the tolerable risk is $10K * 100 = $1 million.
Hold on, you went from "profit to increase size" to "tolerable risk."
Was that a typo or did I misunderstand something?
> Is the glass half full or half empty? If you want to be less
> aggressive in the early stages, adjust your delta parameter to be
> less aggressive. However, that will lead to also being less
> aggressive as equity increases. So, the criticism of being too
> aggressive in the early stages will change to a criticism of not
> being aggressive enough in the later stages.
> Jones does discuss this problem of Fixed Ratio not being
> aggressive enough as equity increases in Chapter 16 "Money
> Management Marriage". He proposes that in the later stages to
> consider switching from Fixed Ratio to Fixed Fractional.
Or you could just avoid the complexity and (in my opinion) excessive
risk of Jones' Fixed Ratio, and use a simple Fixed Fractional
throughout. Start with a higher fraction early on, when you're
willing to accept more risk, and back it off as you get more
conservative. That's really all Fixed Ratio does, except it does it
in a complex manner and I believe it exposes you to too much risk
early on in an attempt to increase to multiple contracts as soon as
possible.
> Also, there is more to the Ryan Jones book than the position size
> increase formulas that we are discussing. He also discusses ways
> to handle position size pull backs in a drawdown
Yes, and those may have some merit. I haven't tested them enough to
make up my mind on them.
> Now, take the example of a money manager starting out with $1
> million to trade. It is a completely different situation. There is
> no way this money manager would decide he is willing to tolerate
> 100% drawdown from his initial $1 million account equity.
Very true. Jones' strategy is clearly aimed at the small trader who
is trying to go from 1 contract (or other small position size) to 2.
He ratchets the leverage up very high in the early growth stages in
order to do that. Someone with a large account would not want to do
that.
> The examples may be cooked, but that does not mean the Fixed Ratio
> strategy is flawed. It just means Jones may have chosen bad
> examples.
He selected examples that made his approach look good -- hitting a
big drawdown *after* he's scaled his leverage way back -- without
mentioning that the exact same drawdown, if it happened a bit sooner,
would have bankrupted him.
I have to question his intellectual integrity. The people he aims
the book at are not likely to have the sophistication to realize the
risks his strategy exposes them to. Given the leverage of futures,
that same drawdown might wipe out their entire account AND a lot
more. I think omitting any mention of that fact is unconscionable.
> >Jones traded himself into a 95% drawdown, presumably using
> >his own MM techniques.
> This is anecdotal evidence at best.
True, and I said so. However since then I've been contacted by
people who watched it happen and confirmed what I said. I haven't
found objective documentation yet, but it sounds likely.
I was told he traded his account up to 600% gain, then traded it
right back down to near 0%. As you say, there are many possible
explanations for that, but it sounds like someone who used too much
leverage. Just like his strategy recommends.
Of course, other people (like Larry Williams) have also had huge
drawdowns when trading in contests -- they use extremely aggressive
tactics in order to win the contest. Nothing wrong with that. But
Larry Williams doesn't tell beginning traders they should use that
kind of leverage. Jones does.
Gary
|