Summary comments about the Fixed Ratio money management method of Ryan Jones
　　
　　Gary Fritz (fritz@frii.com)
　　I read "The Trading Game" and I was NOT impressed. First off, I find it remarkable that people can get so much attention for the radical concept of position sizing. I mean, are there that many people out there who don^t understand that you^ll make more profits (assuming a positive expectation) if you trade multiple contracts!? Jones talks like scaling your size up is a huge revelation.
　　But ignoring that, I think his Fixed Ratio approach is bogus. IMO his entire premise is flawed: he looks at the per-contract profit it takes to move from 1 to 2 contracts, and he says that it should take the same per-contract profit to move from X to X+1 contracts; i.e., if you need $10k profit to move from 1 to 2 contracts, you should need $10k profit per contract to move from 100 to 101. You^d need $1M total profit to increase by 1 contract.
　　I think this is flawed for 2 reasons: first, it relies much too heavily on the size of the contract. The entire leverage structure he computes would be totally different for, say, $250 SP^s vs. $500 SP^s. But the big flaw is his use of additive growth instead of percentage growth. Moving from 1 contract to 2 isn^t equivalent to moving from 100 to 101; it^s like moving from 100 to 200! I think simple fixed-fractional approaches handle the position sizing much more logically.
　　What really honks me off, though, is the way he cooks the books to make his approach look good. Fundamentally what he^s doing is using very high leverage when the account is small, and backing off as the account gets big. This has the advantage that it gets the small account off the ground & running quickly. But it also exposes you to a lot more risk early on. He uses all kinds of examples to show how the FR approach can take a $X per contract loss with a much lower drawdown than FF-but he constructs his examples so that drawdown happens AFTER he^s scaled back the leverage. He conveniently neglects to mention that the FR approach would BANKRUPT you if that same per-contract loss happened early on with higher leverage. Add to that a host of logical and math errors, and I was SERIOUSLY underwhelmed.
　　My advice would be to use a basic Fixed Fractional approach. Decide what leverage works for you, taking into account your risk tolerance, the Optimal F of your system (make sure you trade far UNDER the "optimal" F value), etc, and just risk a constant percentage on each trade. As your account grows, you may decide to back off on the leverage a bit. You can do all that without the Fixed Ratio complexities.
　　PS: According to http://groups.google.com/groups?hl=en&selm=9c957579.0201081404.5c89813c%40posting.google.com Jones traded himself into a 95% drawdown, presumably using his own MM techniques. I can^t verify the accuracy of that claim, but it wouldn^t surprise me at all. As I explain below, all it takes is a drawdown early in the account^s life, while Fixed Ratio has you using dangerously high levels of leverage to produce results like that.
　　
　　Alex Matulich (alex@unicorn.us.com)
　　I agree with most of what Gary Fritz says above. I have been experimenting with the fixed ratio position sizing strategy using ProSizer, the Monte Carlo simulation tool I developed just for this purpose (see http://unicorn.us.com/trading/prosizer.html if you^re curious about it).
　　I compared fixed fraction, fixed ratio, percent risk, and percent volatility position sizing models. In all cases I adjusted the parameters so that the average of the Maximum Drawdown from all the trials came out to 25%. Then I looked at the return. I did this for trades generated by two different trading strategies. My assessments are as follows:
　　· Fixed ratio usually performs better than fixed fraction.
　　· One will likely find that the %risk or %volatility models described by Van K Tharp superior to fixed ratio, for the same drawdown.
　　· Fixed ratio is dangerous: higher standard deviation of draw-downs, higher probability of ruin. It fails to account for equity size or risk per trade.
　　· I think it^s irresponsible for Ryan Jones to promote this method to beginning traders, who won^t understand the risk involved. On the other hand, I have noticed that sometimes fixed ratio is the best-performing model for small accounts.
　　I^m not surprised that Ryan Jones has traded himself into a 95% drawdown. I think that^s partly due to the high risk of fixed ratio, and partly due to the fact that you take every trade regardless of risk,
　　
　　volatility, or account size. I disagree with Gary that one should take the basic fixed fractional approach. My own experiments suggest that there are other models you can use, and combinations of models, that give superior results.
　　DH Dennis (catapult@crestviewcable.com)
　　As is often the case with these "experts," they take a really simple concept, find a way to make it seem complicated, and then sell a book "explaining" the concept. For those who don^t feel like wading through the books:
　　Ralph Vince, fixed fractional contracts = constant * account_size
　　Ryan Jones, fixed ratio contracts = constant * squareroot(account_size)
　　Rewriting those formulas slightly:
　　Vince: contracts = constant * power(account_size, 1)
　　Jones: contracts = constant * power(account_size, .5)
　　There you have it. The big difference is one uses a power of 1 and the other uses a power of .5.
　　But hey! Maybe it^s better to split the difference! I hereby proclaim that my secret power of 0.7 is the key to the universe. I^m going to hire Richard Josselin to go around the country teaching people that the secret to wealth is my formula: QQQQ (four-Q) Ratio: contracts = constant * power(account_size, .7)
　　Disciples who master the beginners course will be eligible for my advanced course (for only $2,999 paid in advance) where they learn that .7 can be changed to something else. Flash (lightbulb comes on) we also need to consider the per-contract risk (max possible loss) of each trade in the formula. Four-Q Super Ratio:
　　contracts = (constant/risk) * power(account_size, power_factor).
　　Advance disciples will be let in on the ultimate secret (for only $29,999 paid in advance.). Flash (solar flare) we should define our max risk by using an adaptive volatility-based disaster stop. Four-Q Ultimate Formulas:
　　risk = disaster_stop = constant * volatility contracts = (constant2/volatility) * power(account_size, power_factor) And there you have our ultimate position sizing formula.
　　The rare students who master it will have discovered the Mother Lode and shall hereinafter be referred to, in hushed tones, as Mother Four-Qers. :-) Seriously though, that last one ain^t bad. Assuming you use a volatility based stop, you can optimize for the terms "constant," "constant2" and "power_factor", as well as how you calculate the volatility, to find something that works pretty well for your particular system, goals and risk tolerance.
　　The End
　　Thank You
　　Send Money
　　Lots of it
　　
　　Dennis
　　
　　
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