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On Sep 16, 10:25am, John Sweeney S&C wrote:
> Subject: Re: Fixed Ratio Money Management
> Why do people suspect that there exists a fixed fraction of capital that
> should always be the amount employed in a trade?
>
John, your question is a good one, but is open-ended. I'd suggest that
people suspect that they should deploy a fixed fraction of capital as
their money management scheme because it has been popularized by a lot
of traders (some of the "Wizards"), and by Ralph Vince. There seem to
be two popular methods in the fixed fractional camp:
1) the small fraction: you risk only 2% to 5% of your
capital each trade. I've read a lot on money management,
but have never found out where this idea started. Do you
know of the original source? This strategy seems to have
the advantage that it drastically lowers the chance of
getting tapped out, so if you have a winning strategy with
with an open ended gain possibility, this strategy keeps
keeps the trader in the game as long as possible, waiting
for the big win.
2) "Optimal F" - trade the percentage that gives you the best
return, without regard for drawdown - Vince popularized this
strategy. Vince tries to show optimal F is the method
that will give the overall best return, without regard for
drawdown.
On the other side of the fence are the methods that add to positions
that are losing ("scaling"), and or that add to positions that are
winning ("pyramiding"), In those cases, the multiple is not fixed.
I've never been comfortable with adding to winning positions, or
betting more if the current approach seems to be working (the
assumption being that you've hit a streak), because this seems to lead
towards a situation where you've bet the farm based upon recent good
performance, and then inevitably your luck turns for the worst and you
lose a bundle.
What methods would you recommend?
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| Gary Funck, Intrepid Technology, gary@xxxxxxxxxxxx, (650) 964-8135
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