Managing risk exposure: The Fixed Risk Ratio

Fixed Risk Ratio

How it works:

This risk management strategy consists in buying a given amount of units per amount of capital held. It was popularised by the legendary "Turtles" in the 1980s (the well-known bet between Richard Dennis and William Eckhardt). This strategy was a key component to their success.

Example:

You can decide to buy 1 mini contrat for every $5,000 that you have. Depending on the contract that you're trading, you'll have 2:1 leverage. As soon as your capital increases by $5,000, you will automatically add 1 unit.

Disadvantages:

-> The problem with this strategy is that it doesn't allow you to increase your exposure according to outcome probability. You therefore have the same exposure for a high-probability trade as you do for a medium-probability trade.

-> For small accounts, this strategy can take a long time before you're able to add a unit, and this is true even if you are able to achieve a high level of profits.

Advantages:

-> Straightforward and simple calculation method.

-> A mechanical approach that allows beginners to not have to worry about position sizing and risk management questions.

-> Exposure increases only if the size of the account increases. The risk level is pre-defined and always stays the same.

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