Need Fixed Ratio help

[MJunior]

Hi,

I have been reading some texts about Fixed Ratio money management (Ryan Jones) but I didn't understand how to implement it in practice. I know that there is a relationship between increasing the number of contracts when the profits also increase and vice-versa (delta variable).

Let's suppose I have US$ 10,000 available in my account and I would like to buy some shares from 2 companies and risk a maximum 2% in each trade, like below:

*** Company A ***
Quantity....: 100 shares
Price.........: 50.00
Stop Loss: 49.00

Total cost ................. = 100x50.00 = 5,000.00
2% risk..................... = 10,000.00 x 0.02 = 200.00
No of shares to buy = 200.00 / 1.00 = 200 (risking a maximum 2%)


*** Company B ***
Quantity....: 50 shares
Price.........: 30.00
Stop Loss: 29.40

Total cost.................. = 50x30.00 = 1,500.00
2% risk...................... = 10,000.00 x 0.02 = 200.00
No of shares to buy = 200.00 / 0.60 = 333 (risking a maximum 2%)


Note: I'm risking 2% in each trade, but in these 2 trades I'm really risking 4% of my total account.

1- How can I find the best starting number of shares for each trade above according to my available account (10,000.00)?

Any help is welcome.

Thanks in advance

 

[damianoakley]

HI,

When you say you want to risk 2% on each trade, 2% of what?

If you mean 2% of your total $10,000, then I'm afraid your calculations above are wrong, but I might have misunderstood your post.

Could you clarify?


Thanks

Damian

 

[rols]

This might help explain. Also some info on my friend Martin Gale

http://www.tacticaltrader.ca/commentary2.htm

 

[MJunior]

Sorry damianoakley.
I already edited the message and recalculated it.

 

[damianoakley]

So if you know how to calculate your position size correctly, what do you mean by "starting number of shares?".

If you could clarify that would be great.


Thanks

Damian

 

[MJunior]

In his book, Ryan Jones gives an example using a relationship of 1 contract for each 10,000.00 account balance (and delta = 5,000.00), like below:

Contract....... Account Balance
1.....................10.000,00
2.....................15.000,00
3.....................25.000,00
4.....................40.000,00


1- If the Ryan's total account is 10,000.00, what criteria has he used to determine the number of contracts to start with? Why he started trading 1 contract instead of 2 or 3?

2-Suppose that in my situation, 1 contract corresponds to 100 shares. How can I know if 100 shares is the best quantity to start trading? (Perhaps 90 or 150 would be better for my 10,000.00 account. This "best" number is what I want to know how to determine it).

I hope I clarified a little bit.

 

[ZEPPO]

My grain of sand

In his book, Ryan Jones gives an example using a relationship of 1 contract for each 10,000.00 account balance (and delta = 5,000.00), like below:

Contract....... Account Balance
1.....................10.000,00
2.....................15.000,00
3.....................25.000,00
4.....................40.000,00


1- If the Ryan's total account is 10,000.00, what criteria has he used to determine the number of contracts to start with? Why he started trading 1 contract instead of 2 or 3?

2-Suppose that in my situation, 1 contract corresponds to 100 shares. How can I know if 100 shares is the best quantity to start trading? (Perhaps 90 or 150 would be better for my 10,000.00 account. This "best" number is what I want to know how to determine it).

I hope I clarified a little bit.

I'd like to apport my grain of sand on this one; here, MJunior, follow this link:
http://www.trader-soft.com/money-management/position-sizing.html
and see if it takes the confusion away; for what is worth: when trading shares, position sizes based on volatility stops may be more suitable.

Eduardo.

 

[damianoakley]

Hi Mjunior,

I understand now. Thanks for clarifying.

Personally, I would say that you are making the issue of position sizing overly complicated with this Fixed Ratio approach. In my opinion, for stock trading you are best using either a "Percent Equity" method or a "Volatility Stop" method that zeppo mentioned above.

I trade stocks every day and the Percent Equity method has worked well for me for years.


Thanks

Damian

 

[TWI]

In practice fixed ratio is only useful if you have a very high percentage win system, otherwise you will find fixed fraction a better approach particularly for your mental health.
I used fixed ratio for a long time before coming to this conclusion, you only really see the drawback when you have a losing streak and until that point it does seem pretty good, if I were you I would avoid the experience.

How you arrive at what you are risking is another thing all together.