Why choose Fixed Fractional Money Management?

[Maza]

When it comes to Money Management most people are clueless as to what technique to use and what amount of risk to take on a per trade basis. This, first of all, stems from the fact that people don't know the system they are trading, they just blindly trade what they found on some forum or trade a system that someone said is profitable. This is not the way to become a successful trader in my opinion. I don't know it might just be me, but before I implement a new strategy in my trading plan I have to back test the crap out of it and ask myself a few key questions after all the back testing is done. First question is the most important, "Is it profitable over the last 3 years", second is, "Is it profitable with all the pairs in my portfolio?", third, "What is my largest drawdown in pips?", fourth, "How many loosing trades did I have during the largest drawdown?" and last but not least "What is my average looser?". Only after answering these questions would I even think of finding the best money management that suits my trading plan.

Now to answer the question in the title of the Thread, "Why choose Fixed Fractional Money Management?", the answer is simple... DON'T!!!! "Why not?!?!?" I can see being asked by everybody. The answer to this question is simple, "Fixed Fractional Money Management" doesn't promote growth at the beginning of the accounts life. Generally people start off with a $10,000 account risking 2% per trade, which translates into a 0.1 lot per position if you trade 2 positions per trade, which means to be able to trade 0.2 lots per position you need a minimum account size of $20,000, so you need to gain a whopping 10,000 pips to be able to increase in position size for the first time (by the way all the lot sizes and pip estimates are based on Forex trading).

So you can notice how slowly your account will grow at the beginning of your career. "But how can I grow my account faster without increasing risk?" well the straight up answer is you can't, but by increasing risk by a measly 1-1.5% you can grow your account much faster. "Yea but I can blow my account much easier than if I stick to the fixed 2% risk ratio" The answer is straight up NO! The thing that you need to understand is that if you have answered all the questions in the first paragraph, you must have chosen the right account size so that even if you incur your largest drawdown you will only loose at the most (and this is depending on your risk tolerance) 50% of your total account. So by using the Fixed Ratio Money Management style you might increase the risk from 50% to 60% of total account but you still won't blow it (the account that is lol) but the increase in account and position growth is worth it in my opinion.

Thanks for reading this post hope it was helpful.

 

[robertofx]

Good post mate. Really informative. Thanks for sharing

 

[Maza]

Good post mate. Really informative. Thanks for sharing

Thanks Roberto,



Maza

 

[NVP]

so are you advocating 2% per trade or not ?

 

[Maza]

so are you advocating 2% per trade or not ?

I'm not advocating the 2% per trade risk, what I'm saying is risk more at the beginning to promote account growth and lower risk as your account grows larger. This is the basics of Fixed Ratio Money Management style. If you choose the right increment, by the time you end up trading 1 standard lot your risk per trade reduces to under 1.5%.

 

[the hare]

Smart move, risking most when you have the least experience. It has to be a winner

 

[Maza]

Smart move, risking most when you have the least experience. It has to be a winner

You know not just new traders start a new accounts... plus if you read the whole post I wrote in a whole bunch of stuff that someone has to do before even thinking of using this type money management... those things that someone has to do before thinking of this type of money management require him/her to know and test the positive expectancy of their brand new system...

I might have forgotten to mention this but at the beginning of the account you still start with trading 0.1 lots per position for the beginning $10,000 and then only when moving to 0.2 lots per position does your risk increase and you still need to make at the least 3,000 pips before that move. Lets be honest what system can make 3,000 pips in a month or 2 (except for the 100% correct systems), before the trader can get used to their system and trade it properly.

So I still stand by my point that Fixed Ratio is better than Fixed Fractional Money Management.

 

[Shakone]

This is junk. Your entire argument comes down to

Generally people start off with a $10,000 account risking 2% per trade, which translates into a 0.1 lot per position if you trade 2 positions per trade, which means to be able to trade 0.2 lots per position you need a minimum account size of $20,000, so you need to gain a whopping 10,000 pips to be able to increase in position size for the first time

Well this isn't true. Where does this 'generally people' come from?

 

[Maza]

This is junk. Your entire argument comes down to


Well this isn't true. Where does this 'generally people' come from?

It was just for example sake... don't hang on to it too much... this can also be translated into all sizes of accounts and all lot sizes... plese excuse the terminology

 

[Tytus_Barnowl]

Maza ,which clearing house do you work for. What you have just described is a method whereby someone can enter the trading world then blow their account in the first month.

 

[the hare]

Maza ,which clearing house do you work for. What you have just described is a method whereby someone can enter the trading world then blow their account in the first month.

There is some merit in the approach. Most people wouldn't mind losing 50% of a £100 spread betting account, but I guess there are few who could live with losing 50% of a significant sized account.


Risk tolerance doesn't scale in a linear fashion with account size, generally it reduces as the account increases, so weighting the risks and returns on the front end (assuming you have your ducks in a row) might make sense in some circumstances.

Of course there are going to be practical problems due to real life constraints of actual position size allowed by brokers etc, but the same arguments apply equally to fixed fractional methods too.

For me, the whole concept of optimizing mm strategies is a bit of a non starter, its one of those things you do, but its all a bit of a waste of effort other than 4 d lulz

 

[D70]

A rather big fund I worked for set our risk limits at 0.25% per trade.
Worked pretty good. You traded the year and as you made money, your "risk" got smaller in effect, protecting the gains you had made. Next year you were allocated a new "pot", bigger if you'd had a good year, smaller if not. Again, 0.25% risk.

Lovely simple system that worked.

 

[nunrgguy]

A rather big fund I worked for set our risk limits at 0.25% per trade.
Worked pretty good. You traded the year and as you made money, your "risk" got smaller in effect, protecting the gains you had made. Next year you were allocated a new "pot", bigger if you'd had a good year, smaller if not. Again, 0.25% risk.

Lovely simple system that worked.

2% risk per single punt is reckless and you'll cry yourself to sleep every night it hits your too close stop loss

Enter small, add when you're right. Be larger when you are winning, be smaller when you are losing. If you lose, you lose a tiny amount, if you win, you win big.

Gamble with your gains, not with your pot.

 

[Maza]

Look first of all I don't work for a clearing house, I'm just a normal trader that wants to teach people about money management and get some help on one style of money management that I'm trying to design, not to market out to people but to implement myself. Now before you rag on me any more please just take the time to read the .PDF file I have attached to this post which explains in great and intricate detail how Fixed Ratio Money Management works, it's only 9 pages so please read it all before you start with the hate again lol. Trust me its easier to read the 9 pages than read the 160 pages of Ryan Jones's book. Thanks in advance for reading the .pdf file and let the criticism begin

 

[Maza]

So anyone have any thoughts about this style of money management?

 

[NVP]

let me read it ............

MM is a hugely important subject but (like Exit Strategies) you wont get much feedback or comment at T2W as its not as sexy as the 99% of posts telling us about Traders "perfect" entry systems

N

 

[Maza]

let me read it ............

MM is a hugely important subject but (like Exit Strategies) you wont get much feedback or comment at T2W as its not as sexy as the 99% of posts telling us about Traders "perfect" entry systems

N

Oh well I was hoping to do some teaching on the subject and get some people I could devise some money management strategies for... In my eyes money management is more important than the "perfect" system... You can have a mediocre system that makes 200 pips a month and still make a killing if you put in practice good money management techniques... Did you get to read the .pdf I dropped in the last post NVP? If you did, how was it, did I explain it properly, any suggestions for changes? (I'm asking you this because you sound like you know what your talking about )

 

[NVP]

Oh well I was hoping to do some teaching on the subject and get some people I could devise some money management strategies for... In my eyes money management is more important than the "perfect" system... You can have a mediocre system that makes 200 pips a month and still make a killing if you put in practice good money management techniques... Did you get to read the .pdf I dropped in the last post NVP? If you did, how was it, did I explain it properly, any suggestions for changes? (I'm asking you this because you sound like you know what your talking about )

really ? ..........hahahahahahahaha

 

[Maza]

really ? ..........hahahahahahahaha

Yea really in my eyes anyone that realizes that money management is one of the most important things in trading knows what he/she is talking about (at least in the domain of money management )

 

[D70]

Oh well I was hoping to do some teaching on the subject and get some people I could devise some money management strategies for... In my eyes money management is more important than the "perfect" system... You can have a mediocre system that makes 200 pips a month and still make a killing if you put in practice good money management techniques... Did you get to read the .pdf I dropped in the last post NVP? If you did, how was it, did I explain it properly, any suggestions for changes? (I'm asking you this because you sound like you know what your talking about )

(facepalm)