Fixed Fractional with ATR Risk - Money Management Strategy

The Fixed Fractional with ATR Risk strategy risks a percent of the portfolio equity on each trade based on the distance to the stop from the entry point of the trade. The measure used to determine the distance form entry to the stop is a multiple of the Average True Range over some (user defined) lookback period.

This strategy has been described in detail by trader Tom Basso in the Chicago Mercantile Exchange publication “How to Become a CTA”. The parameters that are used to determine the number of contracts or shares to trade include the portfolio equity (set at the start of the test), the amount of portfolio equity to be risked, ATR Multiple, ATR Lookback and the Maximum Number of Contracts that can be purchased.

• The percent risk is the percent of the total portfolio equity expressed in the selected currency that is available to invest in a trade.
• The ATR Multiple is the multiple of the Average True Range that will be used to determine the "distance to the stop" as a means of determining initial position risk.
• The ATR Lookback represents the number of bars over which the Average True Range is calculated.
• The Maximum Number of Contracts is the maximum number of contracts or shares that can be bought (or sold) on any trade.

Example

If we are trading the S&P e-mini contract and each point is worth $50 our risk per contract is $50 per point. Let’s say we got a signal to enter a trade and the Average True Range of the last 5 days is 10 points. Now let us assume that in our parameter settings we selected ATR Multiple = 2, so our risk per contract is 10 points*2*$50 = $1000. If the portfolio equity is $100,000 and we have selected to risk 5 percent then we can purchase 5 contracts. Assuming 5 is smaller than the Maximum Number of Contracts, 5 contracts will be used in this trade as this position size.