Blog for Building Expert Advisors for Metatrader 4, EA Programming, Forex

USING FIXED RATIO POSITION SIZING ON EXPERT ADVISORS

 

 

This money management feature has become a standard variable for sophisticated EA programmers using low drawdown trading systems.


In fixed ratio position sizing the key parameter is the delta. This is the dollar amount of profit per contract to increase the number of contracts by one. A delta of $3,000, for example, means that if you're 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. For stock trading, a "contract" can be interpreted as a fixed number of shares, such as 100 shares.


It's possible to derive the following equation for the number of contracts in fixed ratio position sizing:


EA Programming Math

The equation for calculating fixed ratio trading proportions.


Pis your accumulated profit to date, and the triangle, delta, is the dollar amount that you would need before you could trade a second contract or another lot of stock. (This is not the same delta that is a measure of volatility.)


A few points are worth noting. The profit, P, is the accumulated profit over all trades leading up to the one for which you want to calculate the number of contracts. Consequently, the number of contracts for the first trade is always one because you always start with zero profits (P = 0). Also, as you accrue more profits, the number of contracts increases more slowly. A $10,000 profit made early in a sequence of trades will increase the number of contracts more than a $10,000 profit made after many other profitable trades.


Unlike with fixed fractional trading, the trade 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 note that the account equity is not a factor. Changing the starting account size, for example, will not change the number of contracts, provided there is enough equity to continue trading.


As an example, consider the series of trades below. The starting account size was $10,000. The minimum margin for a Forex contract is $1,000. Until you have another $1,000 in your account, you can't trade a second contract. If you're using fixed ratio money management to trade Forex your delta will be $1,000. But this value can be adjustable. For the example bellow DELTA = 9% X Account Balance, therefore it is adjusted as the account balance fluctuates.


Eur Fixed Ratio Chart

Trades and number of contracts in an example of fixed ratio position sizing.

Notice how the number of contracts tends to increase over time as the profits accumulate. This can also be seen in the figure below, which shows the equity curve and compares results of the system using a standard lot size with the fixed ratio lot results. See how a system with relatively low drawdown, as well as low return, becomes more profitable, at the expense of larger draw downs, but relatively lower regarding new margins.


Using Fixed Ratio Positions

Trades and number of contracts in an example of fixed ratio position sizing.


Because the number of contracts always starts at one, the fixed ratio method usually produces better results for smaller accounts. For larger accounts, it may take an unreasonable amount of time to increase the number of contracts to a level that takes full advantage of the available equity.



For more information in fixed ratio position sizing:


"The Trading Game" by Ryan Jones (John Wiley & Sons, New York, 1999)