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Intra day trading using a mechanical breakout system.
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Arriving at my position sizing

Posted 26-03-2008 at 05:02 AM by rdstagg
Updated 17-04-2008 at 04:43 AM by rdstagg
Take the worst drawdown of your portfolio that you can find. Multiply that by 50%.
Add a contract each time you increase your equity by that figure PER CONTRACT.
Worst case for my system is 16,880 but I am going to use 10.900 (prev years worst case) so the 50% fig is 5450. I do this because of the removal of ES which has been such a dog these last 4 years for my system.

This is classic Ryan Jones Fixed Ratio trading.
However this is inefficient beyond a certain point - (How to calculate that is for another blog), suffice to say that beyond Contract 9 we move to Fixed Fractional trading.

End result - we change to 2 contracts per instrument when equity reaches 25,450, 3 when it hits 36,350.

Lots of people have a go at the fixed ratio MM and there are better systems out there (have to have some secrets!) but it really is quite good provided you understand it's logic and use it correctly.
I would stress in my view the only time you should use it is when your account is relatively small.
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Mathemagician's Avatar
"Take the worst drawdown of your portfolio that you can find. Multiply that by 50%." Why? Thanks! jj
Posted 26-03-2008 at 03:29 PM by Mathemagician Mathemagician is offline
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rdstagg's Avatar
Well that's what Ryan Jones says in his book and it seems to work quite effectively.
As you may know he uses Delta to increase contracts and there is a direct relationship between delta and drawdown of 2:1 in my example.
Therefore you know at any point in time that should you suffer a maximum drawdown you will only go down 2 levels of the ladder. ie if you are trading 4 contracts you would return to trading 2 contracts, 10 contracts would revert to 8 and so on.
There is a safer option of using 75% of Max Drawdown as the figure but I have never run into any real problems using 50%.
I would add that there are all sorts of twists you can do to this once you get into it.
The problem with fixed fractional (at the beginning of trading) is that geometric growth is maximised with high percentages but risk is reduced with low percentages. Fixed Ratio requires few actual profits at the beginning (so it's more "efficient" at adding contracts) but more and more profits (in absolute terms) as contracts are added; which is why at contract 9 we should move over to pure Fixed Fractional money management because at that level with that equity the max drawdown I should suffer is 25% of capital.
But I intend to outline the maths for that a little later!
Hope that explains.
Hope that makes sense.
Posted 26-03-2008 at 04:25 PM by rdstagg rdstagg is offline
 
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