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Hi Mitch
To put it as simply as I can:
"fixed ratio determines the increase in the number of
contracts by reference to the rate of increase in equity
rather than a fixed % of equity".
Does it work?
Ryan takes the view the main function of money
management is to know when to increase the number
of contracts. He believes that Fixed Ratio is the best
solution to the problem. His assumes that what is
important is the $ in a account irrespective of how
the profits are achieved.
The opposing view holds that a mathematical formula
ignoring the variables of an approach or system
will not be effective in maximising profits.
For me, it depends on your method. If you are
using a system where all setups have about
the same probability of success, then Ryan's assumptions
will be valid and FR will "work".
e.g. your system has 3 setups all of which have about
a 55% probability of success.
On the other hand where the assumptions break down is
where your setups have widely different probabilities.
e.g. one has a 33% and another 67%.
In this situation Fixed Ratio must be treated with care.
Say you have had a series of profitable trades where
you have used the 67% setup. At this point FR may have raised
the number of contracts to 5.
Your next few trades may be the 33% probability which by
definition have a lower chance of success. You're placing
the maximum number of contracts at a time when you have
the least chance of success.
In the above situation, it'd be best to treat FR as setting the
max number of contracts and then adjusting for the setup's
probability of success.
Viewed in this light, FR does work irrespective of the nature
of your method or system.
regards
ray
R Barros
101/25 Market Street
Sydney NSW 2000
Australia
Voice: 61 2 92673470
Fax: 61 2 92673478
E-Mail: rbarros@xxxxxxxxxxxxxxxxxx
----------
> From: mitch ryder <ynos@xxxxxxxxxxxx>
> To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
> Subject: Re: [fixed fractional vs fixed ratio]
> Date: Tuesday, August 18, 1998 11:40 AM
>
> I have the material from Ryan Jones on fixed fractional vs fixed ratio.
>
> I understand what fixed fractional is. Could someone please explain fixed
> ratio and the difference between the two.
>
> Does fixed ratio actually work?
>
> Thanks
> Mitch
>
>
>
>
>
> Mitch Ryder
> Ynos@xxxxxxxxxxxx
>
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