Profit Fixed Fractional Position Sizing Overview

Introduction to Profit Fixed Fractional

The Profit Fixed Fractional method is a nuanced approach to position sizing that considers both the initial account equity and the accumulated profits for calculating trade size. This model enhances the Fixed Fractional method by allowing traders to potentially increase returns by leveraging profits while maintaining a conservative risk approach on their initial capital.

How It Functions

• Dual Percentage Risk: A percentage of the starting account equity is risked along with a separate percentage of the accumulated closed trade profits.
• Position Sizing Calculation: Once the risk amount is established from both the initial equity and profit, the position size is calculated in the same manner as the Fixed Fractional method—by dividing the risk amount by the trade risk per unit.

Advantage Over Traditional Fixed Fractional

• Capital-Profit Separation: This method differentiates between the initial capital and profits earned, allowing for more aggressive compounding of profits while safeguarding the starting balance with a more conservative risk percentage.
• Flexible Risk Management: Traders can adjust the percentage of risk applied to profits, offering flexibility to be more aggressive with 'house money'—the gains from successful trades.

Practical Example

• Initial Balance and Profit Accumulation: A trader starts with a balance of $10,000 and over a year, earns profits, increasing the account to $15,000.
• Risk Calculation Pattern:
  • Initial Capital Risk: 1% risk of the $10,000 initial balance, equating to $100 risk per trade.
  • Profit Risk: 5% risk of the $5,000 profit, adding an additional $250 risk per trade.
  • Total Risk per Trade: $350 ($100 from initial balance + $250 from profit).

Potential for Higher Returns

• Risking Profits: By risking a higher percentage of profits, the trader positions themselves to achieve higher returns, taking advantage of the compounding effect.
• Safeguarding Initial Investment: The original capital remains protected by a stable risk percentage, ensuring that the foundational capital is not overly exposed as profits grow.

Conclusion

The Profit Fixed Fractional position sizing strategy in the FinStudio Charts module is designed for traders who want to protect their initial capital while strategically using their profits to pursue greater returns. By applying separate risk percentages to the initial balance and profits, traders can customize their approach to align with their risk-reward preferences. It offers a balanced framework that caters to growth-oriented traders while maintaining a foundation of prudent risk management.