Luckily for you, you’re about to learn about a money management technique that will probably end up saving you a lot of money!
Fixed Ratio is what they call it, and you’re about to know what it is!
What Is The Fixed Ratio Technique?
It’s a technique developed by Ryan Jones that looks to place a limit on how much money you spend on each contract and before opening a new one. It does so by telling the trader how long he should wait (in profits) before opening a new contract.
It states that the ratio between the number of contracts being traded and the profits necessary in order to open an additional contract should stay fixed.
To give you an example, if your minimum margin for holding a contract is $7,000, you must maintain that amount of capital in your account per contract. That is, if you want to open a second contract, you must have at least $14,000.
It goes on per contract, and the objective is to force you to save a margin to protect your already-earned capital as well as earn your profits to make your account escalate in a fixed and somewhat predictable manner - all without cutting your exposure to the market but rather making it sustainable.
How Does It Work?
The technique is dictated by an established formula that lets you calculate the amount of equity required for you to scale to an extra contact.
The formula is as follows:
Previous Required Equity + (Current Number Of Contacts + Required Equity Per Contract) = Required Equity For Next Contact
PRE + (CNOC + REPC) = REFNC
If we take it apart element by element, you have that you must multiply the set required margin (also called Delta) per contract times the amount in open contracts you have right now. To that, you add your already-existing equity, and the result is the amount of money you must have in your account to open an additional contract.
● The REPC or Delta is the amount of equity you must have in your account per contract.
● The CNOC is how many contracts you’re trading right now.
● The PRE is the equity available in your account.
● The REFNC is the equity you need to have before adding a contract.
How Can You Use It?
The numbers are so big because it was originally designed for options and futures, but you can use it in Forex by replacing “contracts” with “positions” and using numbers that match your trading style.
As margin-per-contract is better determined with percentages of your total equity, a scalper’s fixed ratio would be more towards a couple of dollars per position, so he can have more open trades at the same time.
Just remember to lower the number of open positions if your account starts to dip below the minimum requirements!
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