Generalized Fixed Ratio MM
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Thread: Generalized Fixed Ratio MM

  1. #1
    I am starting a thread to discuss a Money Management formula which I call Generalized Fixed Ratio. In addition, I call it Shifted Electricity MM because when I first curve-fitted the fixed ratio position dimensions, it resulted in an equation called, you guessed it, altered power.

    I will work up to it over a few articles, to cover most of the bases. It is based on Ryan Jones' novel on MM, except my version of Fixed Ratio doesn't lock you to a specific lot dimensions, which is a significant improvement, particularly when you are coping with mini or micro lots.

    Comments and criticism are welcome , simply try to keep it on topic, and let me complete my first chain of articles (it will be obvious when I am done, I will incorporate an excel spreadsheet at the conclusion ).

    Note: the attachment in post #11 is out of date, the one at the very top of page is current and I am attaching it here also.
    https://www.forexforum.co.za/attachm...5513712729.xls

  2. #2
    Thank you, kore, for starting this thread as money management is exactly what I'm obsessed with now: attempting to discover the best MM approach to utilize my trading strategy (Elliott Wave Analysis).

    I subscribe to this idea (by which capitalist88 additionally agrees) that the bigger one account is, the bigger the risk one can take and vice versa. And I've indeed been utilizing the fixed fractional position-sizing egy thus far due to its relative simplicity.

    I will try out your fixed ratio formula as well.

    (If you can find other elliotticians reading this thread -- and if kore would not mind -- will you tell me exactly what MM strategy works best for you? Please PM me , anyway!)

  3. #3
    Quote Originally Posted by ;
    I'm really glad to see more in depth analysis of position sizing.

    Markets vary from periods to trending periods and from reduced volatility into high volatility and most of permutations of those situations.

    I like the idea of greater risk during early stages of a little account and scaling out as time continues on and the account grows....
    I attempt to manage this using different trading methods that trade in different market conditions, and/or only during particular times of the day, then size rankings based on expectancy of every method.

    Is there a better way?

  4. #4
    Quote Originally Posted by ;
    (If you can find other elliotticians reading this thread -- and if would not mind -- will you tell me what MM method works best for you? Please PM me otherwise, thanks!)
    I do not mind in any way.

    I'm interested in hearing other approaches on scaling risk back as equity grows... mikkom suggested one, there must be others...

  5. #5
    Quote Originally Posted by ;
    I do not mind at all.

    I am interested in hearing different methods on scaling risk down as equity develops... mikkom suggested one, there should be others...
    Well what I've been planning (assuming my account ever gets to the point where it's meaningful and that I could keep a positive expectancy) is to reduce risk through withdrawls of 1/2 of their profits at some predetermined goal. If I turn a $10,000 account into an $11,000 account, I'd take $500 out and put it into some conservative income fund or something. Then I would continue working to boost the new balance of $10,500 and so on...

  6. #6
    Kore, will you please illue your hybrid MM system with, say, a 10K USD starting equity?

    Just trying to make sure I understand it properly.

    Thanks again.

  7. #7
    Quote Originally Posted by ;
    Kore, can you please illue your hybrid MM approach using, say, a 10K USD starting equity?

    Only trying to be sure I understand it properly.

    Thanks again.
    Sure, here are just two examples using the altered power formulation, with equilibrium rising from $10,000 to $50,000 (see at $30k equity, the risk is identical in both cases ).

    1. High risk, low delta

    Target Balance = $5000
    Target Leverage = 20

    Equity : Base lots
    $10k : 1.56 lots
    $15k : 2.00 lots
    $20k : 2.37 lots
    $25k : 2.70 lots
    $30k : 3.00 lots
    $35k : 3.27 lots
    $40k : 3.53 lots
    $45k : 3.77 lots
    $50k : 4.00 lots

    2. Medium risk, higher delta

    Target Balance: $30,000
    Target Leverage: 10

    $10k: 1.37 lots
    $15k: 1.85 lots
    $20k: 2.27 lots
    $25k: 2.65 lots
    $30k: 3.00 lots
    $35k: 3.32 lots
    $40k: 3.62 lots
    $45k: 3.91 lots
    $50k: 4.18 lots

    Notice such as 1, your first risk is greater, but decreases more quickly, due to the lower delta (target balance); such as two risk decreases more slowly.

    Also make sure you correct the base lots in line with the currency pair you're trading along with the expectancy of all your trading procedures. Because most trading approaches have an expectancy of less than 1.0, actual lots traded would be those listed above. I am wary of trading any method that has less than 0.5 expectancy, and won't trade if less than 0.25.

  8. #8
    Ok, because sometimes a picture speaks a thousand words, I plotted some evaluation data in excel to demonstrate a few of the things I've been speaking about.

    For account balance from $10,000 to $200,000, I have plotted three charts per day for Fixed Fraction, Fixed Ratio and Shifted Power.

    The initial chart shows position size relative to the account balance.

    The second chart shows work ratio relative to account balance; this really is how hard each dollar must work to grow the position size.

    The next chart shows risk relative to the account balance.

    You'll notice that fixed ratio isn't so fixed whenever you're close to your beginning balance, but corrects itself once you pass (beginning balance delta).

    Attempting to eliminate this and other inconsistencies resulted in the shifted power formulation.

    A few notes on the three images:

    1. Fixed Fraction includes a flat risk line since you're always risking the same amount. However, the work chart shows how much more your ancient money must work to boost position size.

    2. Fixed ratio has an (nearly ) flat work line since it strives for equal achievement of every dollar relative to how fast position size is increased. This chart was plotted with beginning balance $10,000 and delta $5,000.

    3. Shifted electricity is similar to fixed ratio except it can manage values under the beginning balance, does not possess the initial glitch, and has a work chart someplace between FF and FR (but closer to FR). This was plotted with Target Balance $20,000 and target leverage 10.



  9. #9
    Thanks for the graphs, kore.

    They surely made things much clearer in terms of how the three millimeter approaches differ.

  10. #10
    Quote Originally Posted by ;
    Well what I have been planning (assuming my account ever gets to the point where it is meaningful and I can maintain a positive expectancy) is to reduce risk through withdrawls of 1/2 of the profits at a predetermined goal. If I flip a $10,000 account into an $11,000 account, I would take $500 out and place it into a conservative revenue fund or something. Then I would keep on working to boost the new balance of $10,500 and so on...
    Cap's article had me believing...

    Part of my goal for my own trading account is to one day be able to live comfortably off the yields. Many individuals have similar objectives, I think.

    Also because we develop into higher net-worth individuals, it becomes wise to transfer capital into reduced risk stations, possibly property, long-term small business investments, higher interest offshore bank accounts, managed funds, etc -- or a combination of them and many others.

    Initially I'd been thinking like from the above quote, that after my trading account reaches a certain size (maybe $60k), I would start regularly withdrawing 50% of profits for living and more term investments.

    But today I'm thinking it'd be better to operate this into my MM.

    I'm thinking this curve should get an S shape, remaining close to 0 till equity grows to a certain degree, then rising more or less diagonally for some time, then flattening out again towards 100 percent (but never reaching 100%) as the account matures.

    Another possibility would be to imitate mikkom's MM, specify a start and end point for ramping up the withdrawals, and just plot a direct line between these two points.

    Anyone have some ideas, or doing something similar already? I have a while to consider it out because I wasn't planning any withdrawals until the account reaches its original MM goal...

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