Overview of the Fixed Ratio Position Sizing Model

Introduction

Developed by Ryan Jones and detailed in his book "The Trading Game," the Fixed Ratio model offers a strategic approach to managing the interplay between risk and growth within a trading account. This model is particularly suitable for traders seeking a methodical way to adjust their trading size based on performance, specifically designed to handle the fluctuations of trading profits and losses.

Key Features of the Fixed Ratio Model

• Dynamic Adjustment of Trade Sizes: The Fixed Ratio model dynamically adjusts trading sizes based on the account's performance, allowing for an increase in lot sizes with each profit milestone achieved and a decrease during periods of loss.
• Asymmetrical Growth: Unlike models that advocate for proportional growth relative to account size, the Fixed Ratio model enhances margin growth at a rate that does not directly correlate with the size of the account. This results in a strategic increase in trading volumes during winning streaks and a cautious reduction during losses.
• Risk Management: Initially designed for traders with smaller accounts, this model encourages aggressive tactics when the account is smaller, with a gradual shift towards more conservative strategies as the account grows.

Implementation and Trading Strategy

• Early Aggression and Gradual Caution: Starting with a willingness to take on higher risk for higher growth, traders can aggressively capitalize on consecutive winning trades. As the account balance increases, the model naturally adjusts to reduce the lot sizes, aligning the risk with the new account size and maintaining a balance between risk and aggressiveness.
• Adaptation During Drawdowns: One of the distinguishing features of the Fixed Ratio model is its responsiveness to drawdowns. As losses occur, reducing the account below set thresholds, the model mandates a reduction in trading size. This preemptive measure helps to mitigate further losses and protect the account's integrity.

Advantages and Practical Benefits

• Capitalizes on Winning Streaks: By leveraging consecutive wins, traders can significantly boost their trading power, which is particularly advantageous for those starting with minimal capital.
• Mitigates Risk During Loses: The model’s design to decrease lot sizes during drawdowns helps prevent large-scale capital depletion, offering a safeguard against the volatility of the markets.
• Customizable Increments: Traders can set specific 'delta' points—profit thresholds that trigger changes in lot size—allowing for customization according to individual risk tolerance and trading objectives.

Example Calculation Using Fixed Ratio Model with $10,000 Starting Balance

Starting Balance: $10,000
Pip Value: $10 per pip
Required Pips for Increasing Lot Size: 200 pips

Monthly Progression:

• Month 1:

  • Starting Balance: $10,000
  • Gain from 200 pips: $2,000 (200 pips x $10/pip)
  • Ending Balance: $12,000
  • New Lot Size for Next Month: 2 lots

• Month 2:

  • Starting Balance: $12,000
  • Gain from 200 pips: $4,000 (200 pips x $20/pip using 2 lots)
  • Ending Balance: $16,000
  • New Lot Size for Next Month: 3 lots

• Month 3:

  • Starting Balance: $16,000
  • Gain from 200 pips: $6,000 (200 pips x $30/pip using 3 lots)
  • Ending Balance: $22,000
  • New Lot Size for Next Month: 4 lots

• Month 4:

  • Starting Balance: $22,000
  • Gain from 200 pips: $8,000 (200 pips x $40/pip using 4 lots)
  • Ending Balance: $30,000
  • New Lot Size for Next Month: 5 lots

• Month 5:

  • Starting Balance: $30,000
  • Gain from 200 pips: $10,000 (200 pips x $50/pip using 5 lots)
  • Ending Balance: $40,000
  • New Lot Size for Next Month: 6 lots

Continued Pattern

This pattern continues with the lot size increasing each month by 1 lot, and the monthly gain calculated as:

Gain = 200 pips × Lot Size × $10/pip

This detailed progression demonstrates the exponential growth potential when employing the Fixed Ratio position sizing method. It allows traders to capitalize on winning streaks aggressively while providing a systematic approach to reduce position sizes during less favorable periods, effectively managing risk and aiming to protect profits. This dynamic adjustment helps maintain a sustainable trading strategy aligned with the growth and protection of the trading capital.

Here's the detailed table based on the progression using the Fixed Ratio model, starting with a balance of $10,000 and using $10 as the value per pip:

This table illustrates how the Fixed Ratio model allows for systematic and proportional increase in position size in accordance with the gains from trading, facilitating controlled account growth while managing risk effectively. Each month, the lot size increases based on the ending balance from the previous month, leveraging a higher pip value to accelerate profit accumulation while retaining the option to scale back if necessary.

Conclusion

The Fixed Ratio position sizing model is an advanced trading tool that offers a balanced approach to the often conflicting goals of aggressive growth and risk management. By allowing traders to increase their exposure during profitable periods and decrease it during downturns, the model provides a pragmatic framework for capital growth. It's particularly suited for those new to trading or with smaller accounts, as it requires less initial profit to scale up trade sizes. As with any trading strategy, the key to success lies in consistent application and ongoing adjustment based on market conditions and personal risk appetite.