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(The Answer is: the Fixed Fractional Position Sizing Calculator)
FIXED RATIO POSITION SIZING is a money management trading approach that determines the number of contracts you trade per trade. In fixed ratio sizing the key parameter is the delta. This is the dollar amount of profit per contract to increase the number of contracts traded by one. A delta of $3,000 for example, means that if your currently trading one contract, you need to increase your account equity by $3,000 to start trading two contracts. Once you get to two contracts, you need an additional profit of $6,000 to start trading three contracts. At three contracts, you would need an additional profit of $9,000 to start trading four contracts – and so on. Fixed ratio position sizing was developed by Ryan Jones in his book, “The Trading Game”, John Wiley & Sons, New York, 1999. Trading risk is not a factor in the fixed ratio equation. All that matters is the accumulated profit and the delta. The delta determines how quickly the contracts are added or subtracted. Also of note is that the account equity is not a factor. Changing the starting account size, for example, will not change the number of contracts traded, provided there is enough equity to continue trading. On The Other Hand……….. The Fixed Fractional Position Sizing Calculator determines the number of contracts to be traded based on your starting equity plus your profit or loss on each subsequent trade. As your equity climbs, so do the number of contracts you trade per trade. If your equity falls, so do the number of contracts per trade. Where the fixed ratio does not take into account the risk factor for each trade, the Position Sizing Calculator determines 2 kinds of risk – a) the risk value of the stop loss value for each trade, and b) the risk % in dollar values related to your present equity balance. Each trade risks only that amount that you are comfortable with – usually between 2% & 4% - your choice. No matter how many contracts you trade, your risk per trade is always the same. Determining the risk per trade is paramount to your health. Disregard it and you are doomed to failure. Guaranteed. Involving the calculator in determining the amount of risk give you a leg up on 90% of the other traders. It allows you the chance of mimicking the pro’s who– ALL of them, believe that observing the risk rules are what separates them from the masses. If you don’t mimic them, you have a greater chance of becoming one of those other 90%. All SPBANKBOOK trading systems have now incorporated the Position Sizing Calculator, which are built into each spreadsheets and which automatically determines each contract size.
GOOD LUCK IN 2012
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