Classic fixed-fractional method on Forex

Classic fixed-fractional method on Forex 

 

There is no perfect method of money management that is perfectly suited for use with a wide range of trading systems. Today we will continue to talk about money management methods and get acquainted with the most common of them, as well as consider the advantages, disadvantages and various variations of the fixed-fractional method of capital management. 

 

The classic option tells us that for each transaction it is possible to risk an amount not exceeding X% of the balance sheet or of the equity of the account. It is the most widespread capital management technique, both among professional financial managers and among ordinary private traders. This method is also often referred to as the fixed share method, as it is the percentage share of capital that is used. 

 

Under this method, you simply risk X% of your money in each transaction. For example, you trade a fixed-fractional method using 2% of your deposit in each transaction. Your deposit is 1 $200 and your stop loss is 100 points or 1000 pips. For simplicity, assume that we have an item price of $1 at lot 1. Then our item to which we will be part of the deal will be 1200 * 2%/(1000 * 1) = 0,024 or 0.02 item. 

 

A modification is also common, where the maximum loss is taken into account instead of the value of the stop loss. The fact is that many trading systems have rules to exit deals in a loss-making zone and it is often the case that getting a full stop loss is highly unlikely. Therefore, in order not to underestimate strongly risks and not to limit artificially growth of capital under the system, take the maximum loss according to the results of testing (for example, according to the results of 1000 transactions the maximum loss under the transaction was 80 points) and use it in calculations. And the real stop loss is either not used at all or put it with a decent reserve. 

 

It 's always worth remembering that the market is the market and even when something seems highly unlikely, it 's still bound to happen sooner or later. Therefore, even if you decide to use such an option of calculating the lot, do not artificially increase the size of the feet, much less remove them at all. At a critical moment, albeit with a big slip, but your deal will be closed and at adequate levels of risk you won 't lose much. 

 

Lot rounding rules for fixed-fractional method 

 

 

In the above case, as a result of rounding, we were unable to put the risk at exactly 2% and use the risk (0, 02 * 1000/1200) * 100% = 1.67%. When the bill increases to $1,500 at our given risk of 2% - we will be able to enter the market already lot 0.03. In this case, the risk will be exactly 2%. But from the $1300 deposit level, we could round the resulting lot under standard rounding rules (that is, at 0.025 we would round to 0.03), but in this case the actual risk would already be 2.31%, which is decently greater than the set 2%. Therefore, it is more correct, in my opinion, to always round down so as not to risk extra money. 


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