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Old May 11th, 2011, 04:56 PM   #1
Ghost of Cutten
 
 
Join Date: Aug 2009
Posts: 2,869
This idea came from another thread where I asked about position sizing for slam dunk trade setups, the kind you get a few times a year maybe.

What about taking a portion of your capital that you are willing to lose in its entirety, then waiting for your very best setups, and then 'betting the ranch' using the Kelly formula. Due to various issues with market structure, half Kelly is usually recommended as the maximum size to use.

I would add a further cap on risk, a 'grey swan' check, so you don't end up using silly leverage in case of a 9/11 or other freak event.

I figure if you devote say 10% of your normal trading capital to this 2nd account, then you should be willing to accept the huge swings that a 1/2 Kelly bet size will bring, since they won't be huge relative to your net worth. And, if it works, then you can just keep on trading it. If your setups and trading skill are good enough, your aggressive bet size could result in spectacular compound gains, albeit with pretty high volatility.

Has anyone tried this kind of strategy? Any thoughts on it?
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Old May 11th, 2011, 05:19 PM   #2
drm7
 
 
Join Date: Aug 2010
Posts: 199
Yes. Ed Thorp had similar rules in his convertible arbitrage fund. This particular corner of the market was so inefficent at the time, where he found a rare "pure arb" and scaled his bet accordingly.

There is an extensive discussion of his bet-sizing methods (a scaled-Kelly version) in the book Fortune's Formula:

http://www.amazon.com/Fortunes-Formu...5148689&sr=1-3

Just make sure your set-up is as good as you think.
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