Sizing Positions by Directional Win Rates and Fixed Ratio

Summary

This article proposes a conservative money-management approach that scales position size according to the observed win rate of long and short entries. It first describes Fixed Ratio sizing, which adds contracts only after profits reach a specified amount per contract. The proposed extension tracks trades and wins separately by direction or entry type, estimates a win percentage for each group, and uses that percentage to determine a fraction of a maximum position size. The example illustrates how a stronger historical win rate can produce a larger allocation to that direction.

The author frames the method around capital preservation and discusses trade-offs among win rate, average trade, stops, and drawdowns. In a basic example, the approach did not perform well, in part because initial position sizes were very small; the author suggests testing different starting counts and maximum size settings. These observations are not evidence of robust results. Directional win rates can be noisy, especially with few trades, and the article does not provide a systematic out-of-sample evaluation or a rule for limiting estimation error. It presents the approach as an idea to explore alongside more traditional sizing methods.

Key ideas

• Fixed Ratio sizing increases contracts only after profits reach a defined threshold per contract.
• The proposed extension tracks trade counts and wins separately for long and short entries or for distinct signals.
• A direction’s observed win rate is used to scale its next position relative to a chosen maximum size.
• The author emphasizes downside control and discusses how win rate, average trade, stop placement, and drawdown interact.
• The basic example performed poorly, and the article does not establish that the sizing method is robust or profitable.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.