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 peregrinecap   Registered: Feb 2010 Posts: 79 08-29-12 07:54 PM I am looking for a logical/theoritical approach to position sizing. I have read about the kelly criterion in articles and books, but I find it hard to apply in practice. how do you guys know of any other mathematical/logical methods of position sizing other than kelly? Thanks. Edit/Delete • Quote • Complain
 lindq   Registered: Mar 2002 Posts: 2476 08-29-12 08:48 PM Quote from peregrinecap: I am looking for a logical/theoritical approach to position sizing. I have read about the kelly criterion in articles and books, but I find it hard to apply in practice. how do you guys know of any other mathematical/logical methods of position sizing other than kelly? Thanks. I've always found value in the old rule-of-thumb that a single position should never put more than 2% of capital at risk. That's as good a starting point as any, and if I'd paid more attention to that the first couple years of my trading career, I'd be a wealthier person because of it. Edit/Delete • Quote • Complain
 peregrinecap   Registered: Feb 2010 Posts: 79 08-30-12 05:53 AM as i said rather cleary, i am looking for a logical/analytical methodology, not a rule of thumb Edit/Delete • Quote • Complain
 MasterGambler   Registered: Jul 2012 Posts: 68 08-30-12 07:56 AM The higher your drawdowns the higher the win rate required to stay positive. Position size itself isn't important... It's how much of a drawdown that position size creates when it hits your stop out point. If you work with a 100% drawdown... You need a 100% win rate. If you work with a 2% drawdown... You need a 51% win rate. You also need to calculate for commissions/spread handicap. If a trade costs \$10 with a capture/stop of \$100 you have a 10% handicap. All of these different factors must be accounted for. To calculate win rate required per drawdown... Lets say you have \$100 and have a 2% loss to \$98. You need to win 2.05% back to get back to \$100. So you have a half a percent handicap actually with that drawdown only... Doh... Thought it was more. So anyway, you get it... Pretty simple. Take amount, divide total/drawdown result amount. Calculate percentage gain required to be back to breakeven. Percentage difference will be handicap. Let me calculate out for 5% just because I never have... 100/95 = 1.0526315789 To get back to breakeven... You need 5% plus the extra... Result: 5.26315789 So, quarter percent handicap actually... If you have two losses in a row it compounds though. Anyway, you get it! Edit/Delete • Quote • Complain
 jcl   Registered: Jan 2012 Posts: 407 08-30-12 05:45 PM Aside from the money management books by Ralph Vince, Edward Thorp's fundamental article about using the Kelly criterion can be found as PDF on the Internet - google for "Thorp" and "Kelly". Both use different methods. The Kelly criterion is the best method for allocating capital among different assets, and the OptimalF factor by Ralph Vince is an upper border for re-investing profits. The leverage space model by the same author is, in my opinion, too sensitive to deviations from past performance data. Edit/Delete • Quote • Complain
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