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.

Eric Sprott: Why Are Investors Buying 50 Times More Physical Silver Than Gold?

For the time being, the silver price is essentially set in the paper market where the daily average trade on the Comex is approximately 300 million ounces. An outrageous number when you compare it to the daily mine production of about 2 million ounces. As Bart Chilton, Commissioner of the Commodity Futures Trading Commission stated on October 26, 2010, “I believe there have been repeated attempts to influence prices in silver markets. There have been fraudulent efforts to persuade and deviously control that price. Based on what I have been told and reviewed in publicly available documents, I believe violations to the Commodity Exchange Act have taken place in the silver market and any such violation of the law in this regard should be prosecuted.” Which brings us back to the phrase “Follow the money.” In our view, it is almost inconceivable that investors would allocate as many dollars to silver as they would to gold, but that is what the data shows. The silver investment market is very small. While the dollar value of gold in the world approaches $9 trillion, the value of silver in the forms of jewelry, coins, bars and silverware is estimated at around $150 billion (5 billion ounces at $30 per ounce). This is a ratio of 60:1 in dollar terms. How long can investors continue to buy silver at the current ratios when the availability for investment is only 3:1? We are surprised that the price of silver has remained at such a depressed level compared to gold. Historically, the price ratio between gold and silver has been 16:1, when both were currencies. Today the ratio is 55:1, so what are the numbers telling us? We believe this is one of those times when smart investors will be well rewarded to “Follow the money.”

 Submitted by Tyler Durden on 12/24/2012 - 16:37

Kelly Formula In Trading

Kelly % = W – [(1 – W) / R]

Where:
W = Winning probability
R = Win/loss ratio

The output is the Kelly percentage, which we examine below.

Putting It to Use
Kelly's system can be put to use by following these simple steps:
Access your last 50-60 trades. You can do this by simply asking your broker, or by checking your recent tax returns (if you claimed all your trades). If you are a more advanced trader with a developed trading system, then you can simply back test the system and take those results. The Kelly Criterion assumes, however, that you trade the same way you traded in the past.
Calculate "W", the winning probability. To do this, divide the number of trades that returned a positive amount by your total number of trades (positive and negative). This number is better as it gets closer to one. Any number above 0.50 is good.
Calculate "R," the win/loss ratio. Do this by dividing the average gain of the positive trades by the average loss of the negative trades. You should have a number greater than 1 if your average gains are greater than your average losses. A result less than one is managable as long as the number of losing trades remains small.
Input these numbers into Kelly's equation: K% = W – [(1 – W) / R].
Record the Kelly % that the equation returns.
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