Managing risk exposure: The 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.