[RT] Re: Fixed Ratio or Fixed Fractional?? A different look

["Glen Wallace" <gcwallace@xxxxxxxx>]

Scot:

So you not only use it to determine initial trade size, but also to tune the
trade size while you're still in the trade?  Interesting extension of the
concept.

Do you do this calculation by substituting trade-by-trade profits and losses
for your entire system, with tick-by-tick (or hour-by-hour) profits and
losses for every trade?  I guess that gives you a standard profile  --  a
tiny equity curve, if you will  --  for each trade.  I think we would all
love to hear more.



----- Original Message -----
From: "Scot Billington" <scot.billington@xxxxxxxxxxxxx>
To: "Glen Wallace" <gwallace@xxxxxxxx>; <realtraders@xxxxxxxxxxxxxxx>
Sent: Thursday, March 02, 2000 6:49 AM
Subject: Re: [RT] Re: Fixed Ratio or Fixed Fractional?? A different look

We use optimal f in a little different manner.  During most winning trades
your risk increases intratrade as the market moves in your direction more
quickly than you move up your stop.  If you have a profit objective, you
have more risk as you near the objective etc.

We take a very small % initial risk which allows us roughly 100 consecutive
losses before we hit a 50% drawdown.  As the trade moves in our favor,
creating more risk, we accept that extra risk since it is not our 'core
captial' (total equity not at risk in other positions) at risk.  We allow
the intra trade risk to increase up to 80% of our approximated optimal f.
If a market moves enough in our direction to reach optimal f, meaning the
risk has expanded multiple times, we reduce the risk by reducing our
position size.  This is done by either covering contracts or selling options
vs. them.  This in essence pins our risk to the optimal f for the duration
of the trade.

I find this strategy very useful.  It minimizes initial risk and therefore
risk of ruin.  It also allows you to take more risk when you are winning on
a trade by trade and portfolio basis.  Large winning trade may operate right
at the optimal number.  It has improved our risk/return ratio on the trades
on which it was used by over 7-1.

sb

----- Original Message -----
From: "Glen Wallace" <gcwallace@xxxxxxxx>
To: <realtraders@xxxxxxxxxxxxxxx>
Sent: Wednesday, March 01, 2000 8:19 PM
Subject: [RT] Re: Fixed Ratio or Fixed Fractional?? Pros and Cons of Each

> Gary:
>
> Back testing over a long period of time over all kinds of market
> conditions will tend to give you a more representative largest loss.
> Probably not the career-ender loss that's in store for a person if
> they do this long enough, but I suppose that's the risk ya' take  :)
>
> In my opinion, the key is to stay to the left of the optimal f peak (for
> those not familiar with optimal f, picture the peak of a normal
> distribution curve) and accept a lower return for the reduced risk.  Not
> too far to the left, mind you, because the reduction in return is not
> proportional to the reduction in risk.  Trading at less than optimal and
> how much less is up to the individual and their own risk threshhold.
>
> I would be interested in hearing more about your friend's Conservative f
> technique.  Also, be careful with substituting average loss for largest
> loss.  The effect of this is to reduce your equity-per-contract figure
> (f$) which, in turn, might make your position sizes too big when you hit
> a string of large or largest losses.
>
> Regards.