Listen, I am going to reveal trading secret again! 🙂
I have been working on position sizing and risk management stuffs recently. I am trying to optimize the return of my trading since I see consistency in my trading recently. So, instead of increase setups or trading opportunities, I am thinking of stick to the old trick but increase position size, etc. However, this is not an easy subject.
I come across Variable Fractional Percent (VFP) from chaffcombe’s site.
He is a full-time currency trader, who is more into automated trading. Here is what I found from his explanation of Variable Fractional Percent (VFP)
Firstly you need to know your daily Net Asset Value (NAV) gain or loss in percent.
Start trading at a conservative 5% FFP (or whatever suits you). But instead of using a Fixed Fractional percent, you use a range say 2%-25%. Move up and down the scale by adding or subtracting half of your last daily NAV percentage.
For example start at 5% FFP
Next day profit on trades = 1.5%
Therefore your next FFP = 5 + (1.5 * 0.5 ) = 5.75%
Say you then lose 3%
Next FFP = 5.75 + (-3 * 0.5) = 4.25%
Obviously use ranges and a daily factor (here 50%) that suits you, but you’ll find this method really rewards good methods, and lightens up very quickly on bad.
The idea that catches my attention is that the method utilizes part of your previous day’s trading profit to determine the position size of your next trade. They put you in the condition that when you are on a roll, you are able to profit as much as possible, while during the drawdown, the system is reducing your position size accordingly.
The prerequisite of this management method is to have a consistent trading system. It doesn’t turn a losing system to a profitable system, but it maximizes the return of a profitable system and reduce the damage from a losing system.
I thought this idea provides some food for thought.