Kelly Criterion

dusktrader
Trader
Posts: 13
Joined: Tue Nov 22, 2011 3:52 pm
Location: North Carolina

Re: Kelly Criterion

Post by dusktrader »

Hi Gary, I am testing now 4% risk per trade, which is actually significantly higher than I'm used to risking, but the reading I've done on Kelly has given me confidence.

I agree full Kelly or even half Kelly are way more than I could do. I just like this particular calculator because it's super easy to understand (I'm not a math whiz) and works in a spreadsheet.

Sounds like you're saying that it assumes worst case scenario on the losses, which in my book would be preferable (ultra conservative).
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garyfritz

Re: Kelly Criterion

Post by garyfritz »

It assumes you totally lose your bet, which is essentially true. If it tells you to risk 10%, then you size the bet so you lose 10% if you hit your stoploss. The way they express it is just confusing, to me anyway.
6y588

Re: Kelly Criterion

Post by 6y588 »

I have been trading using the traditional % risk of account balance, e.g 2% of account per trade. But from my experience, different bots tend to perform differently. Hence, for some bots, 2% may be under utilizing the margin and balance, while for others 2% may have a higher possibility of drawdown. Hence, there is no one-size-fits-all % risk of account balance. This makes the method inefficient as well as risky in some cases.

I am aware of the Kelly method, which was discussed in Ernest Chan's book, but instead I focused my attention on the Monte Carlo (MC) simulation and analysis for position sizing. Has anyone tried this method?

(1) Get the actual returns from the robot as data;
(2) Calculate the ave profit, loss, and winning pct as inputs;
(3) Perform the MC simulation and analysis, and compute the maximum drawdown;
(4) Set a comfortable drawdown, e.g. 20%, and then calculate a ratio k = maxDD / userDD, e.g. If maxDD = 40%, then k = 40/20 = 2;
(5) Adjust the risk using k, e.g. If your initial risk is 5%, and k is 2, then adjusted risk = 5% / 2 = 2.5%.

Regards
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