Fixed Ratio Position Sizing
In fixed ratio position sizing the key parameter is the delta. This is the amount of profit per contract to increase the number of contracts by one. A delta of 1,000, for example, means that if you're currently trading one contract, you would need to increase your account equity by $1,000 to start trading two contracts. Once you get to two contracts, you would need an additional profit of $2,000 to start trading three contracts. At three contracts, you would need an additional profit of $3,000 to start trading four contracts, and so on. The EminiES uses a delta of 545 based on best optimization parameters using Monte Carlo analysis.
Fixed ratio position sizing was developed by Ryan Jones and published in his book “The Trading Game,” John Wiley & Sons, New York, 1999.
Fixed Ratio Position Sizing Guide
This money management plan is determined by the net profit (“delta” factor) of the system, over and above the starting equity balance. The more you make, the greater the number of contracts per trade. Drawdowns from one profit level to a lower one will result in a reduction of the contracts per trade. At no time will an increase in the number of contracts occur if the starting equity balance is reduced. Increasing the “delta” factor reduces the risk. Decreasing "delta" increases the risk – but you get there faster. The highest risk period is when equity is low. As you acheive equity growth the maximum risk per trade decreases protecting profits.
A picture is worth a thousand words. Below is the EminiES performance from 1/1/2014- 9/14/2015, excluding monthly system fee, trading one contract, deducting $10 R/T fee, and starting with $2000 equity. You will notice that the ending equity is approximately $8,863.
Below is the SAME track record starting with one contract but increasing the contracts based on the powerful fixed ratio position sizing strategy with delta 545. You will notice that the ending equity is approximately $37,783.