Chapter 6 - Fixed Ratio Trading
Came about as a direct result of studying and breaking down the Fixed Fractional method.
Risk and Reward
Proper MM addresses both risk and reward. Optimal f only addressed overall growth, while fixed fractional only addressed the risks, leaving the growth faltering.
Only antimartingales can be considered in Jones’ philosophy of the markets. Trade size should increase with equity and vice versa. This is the starting point.
First Jones looked at the pros/cons of the Fixed Fractional method.
Pros:
In FR the amount needed for the next increase in contracts increases proportionally which reduces risk below FF; at the same time geometric growth is faster.
Since the risk is lower, a smaller fixed ratio can be used.
Came about as a direct result of studying and breaking down the Fixed Fractional method.
Risk and Reward
Proper MM addresses both risk and reward. Optimal f only addressed overall growth, while fixed fractional only addressed the risks, leaving the growth faltering.
Only antimartingales can be considered in Jones’ philosophy of the markets. Trade size should increase with equity and vice versa. This is the starting point.
First Jones looked at the pros/cons of the Fixed Fractional method.
Pros:
- Geometric growth is possible
- Risk is managed with lower percentages
Cons:
- Higher percentages result in catastrophic risk
- Lower percentages are inefficient
- Middling percentages do not balance risk/reward satisfactorily
The fault is ‘unequal achievement’. It’s illogical to demand more profits at the start and fewer as equity increases. It should, if anything, be inverted.
The key is the relationship between the number of contracts traded to the amount of profits required to add an additional contract.
If MM requires $10k to increase from 1 to 2 contracts, then it should require $20k additional profits when going from 2 to 3 contracts. There is a fixed ratio of contracts to required profits. That’s how it got its name.
The only variable in FR is called ‘delta’. It measures the money needed to change lots.
In FR the amount needed for the next increase in contracts increases proportionally which reduces risk below FF; at the same time geometric growth is faster.
Since the risk is lower, a smaller fixed ratio can be used.
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