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At 8/5/2002 04:02 PM, Paul M. Zislis wrote:
>Following is a formula I know to be correct:
>
>NewSize = SQRT(2*CurrentProfit/delta + .25) + .5
>
>To be clear, CurrentProfit is what it says... profit. In other words, it is
>current account equity minus initial account equity.
>
>Of course SQRT won't give an integer result so you need to round or
>truncate it (I add the .5 shown above and then I truncate it).
>
>Also, the above formula is only the basic Fixed Ratio during equity runups.
>It is more complicated to implement the calculations for when your
>account is in a drawdown. Jones suggests several methods for handling
>drawdown.
To expand upon this, the above formula is to calculate fixed ratio position
size based upon current profit. Another way to look at fixed ratio position
sizes, where the math is less complex, is the table driven approach as
shown in the Ryan Jones book. The table driven approach calculates the
additional account equity needed for each successive increase in position
size. The calculation is simple: To increase from N contract to N+1
contracts requires an N * delta increase in account equity.
I recently posted a spreadsheet showing this table driven approach. It is at:
http://www.powertesting.com/FixedRatioExample.html
I just took out my calculator and compared the position sizes from the
formula Paul shows above to some numbers in the spreadsheet, and they do
match. So, these seem to be two approaches to the same task.
To contrast the approaches: The formula is for calculating fixed ratio
position size based upon any arbitrary current profit. In other words, the
formula is better for writing code. On the other hand, the spreadsheet is
simpler and more obvious if your goal is to get some perspective on how the
fixed ratio numbers lay out at progressive account thresholds. In other
words, the spreadsheet is more visual.
Bob Bolotin
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