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On Sep 14, 9:17am, Conrad Bowers wrote:
> Subject: Re: Fixed Ratio Money Management
>
> Curtis Arnold talks about Fixed Fractional money management in his
> book. It's simply the idea that rather than a portfolio with a fixed
> number of contracts, say one corn and one bond, you adjust the number of
> contracts you trade according to market volatility and your current
> account balance. Say you're going to risk 2% of a 50,000 account (1000)
> on each trade.
This 2% figure is often mentioned. What's the basis for using that
number? A back of the napkin calculation says that you can lose about 30
times in a row, 2% each time, before you've lost half your initial capital,
is that the idea?
> Take your expected entry minus your stoploss point and
> you have approx. (nominal) risk per contract, R. 1000/R = number of
> contracts to trade this time.
> He states that the advantages of this are: 1. equally weights
> contracts
> of different size/volatility; 2. allows gradual increase in trading size
> as account grows; 3. adjusts for particular volatility of a given time
> period; 4. automatically cuts down your trading if things aren't going
> well.
I'd think about using a different strategy that uses the exchange
min. initial margin calculations as part of the equation. The reason
is that the exchanges set the margins based upon current
or expected volatility, so you're letting them do some of the risk
management calculation for you.
So, I'd start with:
MAXNC = floor(EQUITY / MARGIN)
Now, the question becomes, given the max. number of contracts that I
can trade, how many should I trade? Not sure here, but when I look
at the new e-mini for example, it shows an initial margin of $2100,
which is equal to about a 4% move in the S&P. I'm more comfortable
with about a 10 point stop on the S&P, or 1% move, or $500 on the e-mini.
If I want to set this $500 to 2% of something, I'd multiply by 50,
and come up with $25000/contract, thus I could trade 2 contracts
per $50000, or about 1/12 of the MAXNC calculated above. Rounding
off a bit, I might set the number of contracts I trade as 1/10-th
the max. calculated above, or:
NC = floor(EQUITY / (10 * MARGIN))
If this broad generalization works, then I'd come up with
the following table for trading a $250,000 account:
NC
Live Cattle 46
Pork Bellies 15
British Pound 13
E-MINI 10
Japanese Yen 8
S&P 1
I'm not sure what to think about trading only one S&P (big contract,
now, maybe 2 contracts soon) in a $250,000 account (given a $5000
stop); obviously, using the math above, you couldn't take too many
hits before this formula would have you trading _no_ big S&P
contracts. Let's say on average you made 3 big points per trade
($1500) - to make a 50% ROI on $250,000, you'd need to trade 125000
/ 1500 => 83 times in a year (not to mention that an average profit
of $1500 is probably pretty good).
Are most experienced traders actually trading with this little leverage,
and still achieving +20% returns?
Anyway, it seems to me that once you set your risk tolerance, you can
let the margin police help you with your risk calculations so that
the amount of risk you take in each position in different commodities
is roughly balanced.
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| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
|