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DOES FIXED RATIO MONEY MANAGEMENT REALLY WORK?
The Money Management side of trading systems is perhaps the most overlooked aspect of trading. While most traders tend to focus on finding an "edge" in the markets -- a profitable trading system or method -- the greatest opportunity for profit is often found in methods for applying an existing system or method. These so-called money management methods, such as position sizing, are the main focus of the article below:
There are many money management approaches such as:
The simple stop loss (that should always be implemented) Position Sizing Fixed Ratio Position Sizing Fixed Fractional Position Sizing Position Sizing Optimization Monte Carlo Analysis Trade Dependency Significant Testing Equity Curve Trading Performance Evaluation Etc.
The KEY to Massive Wealth in the Markets is NOT based on where you get in and out. It is NOT being able to accurately forecast market direction and it is NOT based on how good your trading system is.
In this article, we will zero in on the Fixed Ratio Position Sizing Approach. The FR approach is one that determines how many contracts one trades per trade. This approach can take a mediocre profitable system and convert into a dynamic and considerably much more profitable system
This money management plan is determined by the net profit (“delta” factor) of the system, over and above the starting equity balance. The more you make, the greater the number of contracts per trade. Drawdowns from one profit level to a lower one will result in a reduction of the contracts per trade. At no time will an increase in the number of contracts occur if the starting equity balance is reduced. Increasing the “delta” factor reduces the risk. Decreasing increases the risk – but you get there faster.
A picture is worth a thousand words. Below is a short term S&P strategy 3 1/2 year track record trading 2 contracts per trade. You will notice that the end result is a net profit of approximately $290,000
Below is the SAME track record starting with two contracts but increasing the contracts based on the powerful fixed ratio position sizing strategy. You will notice that the net profit is over $850,000!
There are several things that I want to point out with this comparison:
The SAME exact entry and exits were used on both examples. Every trade was exactly the same in both scenarios. The fixed ratio position sizing strategy (money management strategy) increased the profit by a factor of almost 3 times trading a constant double contract. The number of contracts being traded at the end of the money management example is at 18.
It should be pointed out that the systems profit levels that determined how many contracts were to be traded (the “delta” levels), using the fixed ratio approach, was extremely conservative. If those same profit “delta” levels, were changed to conform to the margins required to trade each contract, the net profit would have been over $3,500,000 (that’s right, three and a half million dollars). The spreadsheet that accompanies this trading system allows you to make any changes you want to the “delta” factor. You determine what you are comfortable with.
This is the obvious benefit of proper money management.
“...and all this occurs without affecting your starting equity balance”.
90% of traders focus on where to get into the market and where to get out. It is estimated that 90% of all traders end up losing money. I believe these two stats are closely related because money management is barely an afterthought with so many traders.
YOU CAN BEGIN TO BENEFIT FROM THE POWER OF THE FIXED RATIO MONEY MANAGEMENT STRATEGY TODAY
The charts above are from the TRENDWAY TRADING SYSTEM. You can see the results of this trading system for the last 7 years by going HERE
To order the TRENDWAY TRADING SYSTEM—including the trading manual, the trading spreadsheet and the procedural manual—Go HERE
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