THE LOGIC BEHIND THE FIXED RATIO METHOD

I realize some of you may be saying that a fixed fraction and a fixed ratio are the same thing. But, in fact, they are referring to two different subject matters and that is the difference. The fixed fractional method is referring to what percentage of your capital should you risk on the next trade, and every trade thereafter.

The Fixed Ratio method is referring to difference between each increase and decrease. This is the key. You will recall earlier in the article that I gave examples using average times to increase as well as average dollars to increase. Using the fixed fractional method, the time needed to increase at the beginning was far slower than the time needed to increase further into trading. The dollars required to increase contracts at the beginning was far more than the dollars required to increase contracts at higher levels. In all of the research, this was the flaw in the method, the fly in the ointment if you will. Fixed ratio corrected this flaw by simply making these differences EQUAL or FIXED.

For example, if it took an average of 10 trades to increase from one to two contracts, it will take an average of 10 trades to increase from 19 to 20 contracts. If it takes an average of $10,000 WITH THE FIRST CONTRACT to increase from 1 to 2 contracts, then it will take $10,000 PER CONTRACT to increase from 19 to 20 contracts. In other words, there is a Fixed Ratio of contracts traded to dollars required to increase. It goes like this. I call the ratio between contracts traded to dollars required the "delta". This simply means "change".

Depending on how aggressive or conservative you want to be, you simply change the delta in the following formula accordingly. A smaller delta is more aggressive while a larger delta is more conservative.

Current Balance + (#contracts * Delta) = next increase in contracts.

 A $20,000 starting balance using a $5,000 delta would increase from 1 to 2 contracts once the account reached $25,000. To increase from 2 to 3 contracts, you would apply the same formula: Current Balance = $25,000 + (2 contracts * $5,000) = $35,000. You would increase to 3 contracts once the account hit $35,000. This continues throughout your increases.