Fixed Ratio Money Management & Techniques to find Optimum Delta

[TWI]

As a rule I use a Fixed Ratio money management but I have never really felt I have had a good handle on the optimum delta value. How have others dealt with this?
What I have used for a long time is a spreadsheet that works as follows:

In column A: put consecutive numbers going down to represent the progression of increasing lots as you advance.
In B: put the starting account equity in the first cell, then calculate the different fixed ratio levels needed to reach the increasing lots in column A,[(number contracts^2 - number of contracts)/2*delta] . Best to use a blank cell somewhere to put the delta value so that you can adjust it later.
In C: put the margin cost of owning the lots in A
In D: subtract C(Margin Cost) from B (Equity)
In E: put the maximum draw-down (conservative) per lot times A(number of lots)
In F: subtract E(draw-down) from D(Equity - Margin Cost)
20 or so rows should be enough. Adjust the delta to find one that doesn't cause any number in F to turn negative. The smallest of these is the delta to use (assuming that your draw-down is reasonable).

Would be interested to hear of any insights and experience others have had over time with their money management techniques and how fixed ratio may be improved upon.

 

[Tuffty]

twalker, Not sure if any of my comments below will be useful.

The calculation automatically assumes a maximum gearing (delta) level for the amount of money called equity.

This could cause problems if the total geared position size got so large v. portfolio size that given a catastrophe it could do serious financial damage so I monitor this to constrain the open market position size if necessary.

I also play with all the variables to see what I’m happy with and how they inter-relate. The variables are draw down, gearing/(delta), equity, risk (ie a defined stop loss for the strategy), total open market position size, and lastly projected return.

As to improve on the methodology the only thing I’m aware of is to eliminate ‘drag’. However, eliminating this tends to increase risk, or reduce potential. (‘drag’ = If you loose 10% you need to make more than 10% to get back where you started). I note the Goldline Trading System results posted on their web site used such a ‘drag’ eliminating system. The bet size did not fall when loosing. You’re therefore betting on never having more that x number of losers.

 

[TWI]

The bet size did not fall when losing

That could certainly have very nasty consequences. I have actually found that if anything it is better to drop the gearing faster than you grow it.
Thanks for your comments I will think about them and revert.
One of the key things I have changed in the last year is to stop in and out of the strategy based on draw-down. I used to just use my intuition for this which generally had serious draw-down consequences. Quantifying when to stop and restart a particular strategy is something I am putting a lot of effort into.

 

[Tuffty]

Sounds like you're using the Richard Dennis technique. In the interview in TA of S&C he talks about picking the system for the particular market enviroment he invisages going forward.

 

[rdstagg]

Might I suggest you read Ryan Jones book
The Trading game.

He is the Archangel of Fixed Ratio and he talks extensively about the pros and cons of applying different methods.
The answer however is still Delta = 50% of max drawdown! Or 75% if you are really aggressive - and have cojones of steel.

That could certainly have very nasty consequences. I have actually found that if anything it is better to drop the gearing faster than you grow it.
Thanks for your comments I will think about them and revert.
One of the key things I have changed in the last year is to stop in and out of the strategy based on draw-down. I used to just use my intuition for this which generally had serious draw-down consequences. Quantifying when to stop and restart a particular strategy is something I am putting a lot of effort into.

 

[vegetablevn]

Might I suggest you read Ryan Jones book
The Trading game.

He is the Archangel of Fixed Ratio and he talks extensively about the pros and cons of applying different methods.
The answer however is still Delta = 50% of max drawdown! Or 75% if you are really aggressive - and have cojones of steel.

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[Mr.Angelo]

As a rule I use a Fixed Ratio money management but I have never really felt I have had a good handle on the optimum delta value. How have others dealt with this?
What I have used for a long time is a spreadsheet that works as follows:

In column A: put consecutive numbers going down to represent the progression of increasing lots as you advance.
In B: put the starting account equity in the first cell, then calculate the different fixed ratio levels needed to reach the increasing lots in column A,[(number contracts^2 - number of contracts)/2*delta] . Best to use a blank cell somewhere to put the delta value so that you can adjust it later.
In C: put the margin cost of owning the lots in A
In D: subtract C(Margin Cost) from B (Equity)
In E: put the maximum draw-down (conservative) per lot times A(number of lots)
In F: subtract E(draw-down) from D(Equity - Margin Cost)
20 or so rows should be enough. Adjust the delta to find one that doesn't cause any number in F to turn negative. The smallest of these is the delta to use (assuming that your draw-down is reasonable).

Would be interested to hear of any insights and experience others have had over time with their money management techniques and how fixed ratio may be improved upon.

Hello TWI, I was reading this thread and I'm seeing the discution about the DELTA in the FR m.management, I would like to know if you or someone could set the propper Delta to have an optimized system, in one of the last post, a friend told about 50% of the max. drawn-down, I would like to know if it is working and what this really means, I couldn't understand what is exactally the 50% of the max. drawn-down.
.
I'm using this system for a little while yet, so I do not have so much experience.
.
If you or someone is able to help me I would really appreciate.
.
Thank you

Angelo

 

[johanelmander457]

Hi

I found that a member asked same question in this forum 4 month ago.

Pls use search box to find this questions.

Rgs

 

[johanelmander457]

Hi

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