The problem with the comparison to a 20 sided coin is the following. 1) While based on analysis/research/history it seems that the chance for profit is 95%, you might have made a mistake with the analysis (mistakes happen by everyone) 2) Markets change. Even if something is 95% today, it can be different tomorrow. A 20 sided coin is a 20 sided coin, and always stays that way. Thatâs also the reason why Kelly is hard to justify. The question is where the balance is.
For the last time, markets do NOT change, they go up, they go down, they go sideways, THAT'S ALL THEY HAVE BEEN DOING SINCE DAY ONE!! Buy when they go up, short when they go down, and do nothing (or sell options) when they are going nowhere, that's all there is to it.
Oh I completely agree, and that is why I used my coin idea because it is something concrete. But I hardly doubt that in trading there can be a 95% chance of something happening the way you thought it would.
i make my trades riskless as possible.. low volume, tight spread, 1.00 intraday range. After a while you just know what to risk
Sure you can. Buy a $100 stock. Put your take profit at $105, no stop loss. You will win that trade 95% of the time. Most traders do not realize that profitability in trading has nothing to do with percentage of winning trades.
So what you're saying is that 95% of the stocks out there will at some point be worth 5% more than they are at the present day? I don't think I can believe this. I have no idea what the actual number is, but even without a time frame, I doubt that 95% of all stocks will one day be worth 5% more than they are today. Can you back this up in any way?
A simple example to illustrate: We are playing Head or Tail for a dollar per game. We each have a $100 bankroll and we will keep playing until one of us is broke. 99% of the time, I will win at least $1 before you take my entire bankroll. Same thing here with stocks, it's just simple mathematics.
The question is posed in improper terms and cannot be answered without considering win and loss. If for example the potential loss were to be 20% of the wager and potential win 40%, OBVIOUSLY, the sensible thing would be to wage the entire capital, thus risk 20% per event, in your terms. This except if there's the risk of capital dropping below a participation treshold in which case one accomodates for, say, 4 losses in a row (p=0.0005). That's an arbitrary parameter. (Assuming no impact in relation to some utility function of time or alternative uses for the capital) Of course the choice becomes more difficult as the profitability of your hypothetical, p=0.95, game decreases, as the potential win becomes significantly smaller than the potential gain (absolute terms R<<1). Also at some point as R << 1 the game's capital growth curves could show such high variance as to bring into consideration the risk of a lethal adverse excursion (ie. in case of a participation treshold). The profit maximizing fraction of capital, 'f', will however be less than 1 and greater than 0 only for a very limited range of 'p' and 'R' combinations resulting in a 'g' (mean geometric growth rate of capital) ~1.005; so for marginally profitable games. More typically 'f' will be either 1 (bet everything) or 0 (don't bet). - ras72
Errata corrige: "Of course the choice becomes more difficult as the profitability of your hypothetical, p=0.95, game decreases, as the potential win becomes significantly smaller than the potential loss (absolute terms R<<1)..." The bottom line is that if the game is in the small range in which the profit maximizing 'f' is between zero and one get a software to calculate it. - ras72
Please indulge my simplistic nature and take me through how you calculate that there is a 99% chance it will turn out as you say. I'm not questioning that you are correct ... the result makes sense to me in a common sense way but frankly I do not know how to set the problem up to solve the problem or others that are similar and I would like to be able to do that.