Ultimate Algorithmic Trading System

■ Fixed Fractional
272
PORTFOLIO ANALYSIS
Fixed Fractional is by far the most popular form of money management in the
world of futures trading. This approach allocates the same amount of capital to each
market. Perceived risk is usually defined as a function of a market’s average true
range calculated over the last N days. Dividing the amount of capital by market
risk gives the position size for the next trade. This form of money management
normalizes the markets by maintaining the same amount of perceived risk across all
markets in the portfolio. Here is the formula:
Position size =(Account capital in dollars × Risk per trade in percent)∕
ATR(N) in dollars
Assume you have a $100,000 capital allocation, and you want to risk at most 1
percent on any given trade. Assume the 10-day ATR in Treasury notes is $500.
How many contracts should be initiated on the next trade? Plugging into the formula
we get:
Position size =(100, 000 × 0.01)∕500
Position size = 1000 ∕ 500 = 2
So two contracts of T-notes will fit our 1 percent risk criteria. Now assume you
want to trade Eurodollars as well and need to know that position size. Let’s say the
10-day ATR in Eurodollars is $125. Plugging into the formula again, we get:
Position size =(100, 000)×0.01 )∕125
Position size = 1000 ∕ 125 = 8
Eight contracts of Eurodollars provides the same risk as two contracts of T-notes.
See how the different markets are normalized to provide the same amount of risk?
Utilizing a Donchian 55-day breakout with a trailing 20-day liquidation and a fixed
dollar stop, let’s see how this money management formula works in practice.
■ Portfolio Maestro
Portfolio Maestro (PM) is an add-on to TradeStation and requires an additional
monthly fee. If you have it you might want to follow along with this tutorial. If you
don’t, then read on and see if it might be something you may want to investigate.
From TradeStation you can launch PM by clicking on the Trading Apps tab, and
then selecting Portfolio Maestro. PM will launch and you will be presented with the
window shown in Figure 9.1.
Once you get used to the interface, building and testing portfolios will become
old hat. However, the first few analyses may take multiple attempts to get everything
the way you want. Hopefully, this tutorial will help along the way.
www.rasabourse.com