How to calculate Kelly for multiple r/r's?

Discussion in 'Risk Management' started by none4425, Aug 12, 2019.

  1. none4425

    none4425

    Suppose I have backtested my strategy.

    800 wins and 800 losses. With each trade having an average r/r of 2:1.

    However each trade has a different r/r. So one trade might be a r/r of 3:1 and another a r/r of 1:1.

    Should the kelly still be calculated as

    (2 (average r/r) * 0.5 (win rate) - 0.5 (loss rate)) / 2 (average r/r)

    or is that not correct?
     
  2. Geissbock

    Geissbock

    Kelly formula works for bets with even outcomes like coin tossing which is typically not the case in trading - as you say. Therefore calculating a Kelly % may not tell you a lot. You can read Ralph Vince's book "The Leverage Space Trading Model" on the topic if you want to dig deeper.
     
  3. ironchef

    ironchef

    I was waiting for the professional traders to give you their answers. Since none showed up, let me give you an amateur retail's perspective:

    I accumulated thousands of option trades over the past 6 1/2 years. When I looked at my average win:loss & risk:reward ratios, they were actually quite stable. Each individual trade may have different probabilities but I used the blend win:loss and R:R ratios to calculate my Kelly.

    The key is to have a positive expectancy or it is moot. The other is to not bet full Kelly. For me, it was actually consistent with what folks said: Not to risk > ~1%-2% of total capital per trade.

    Good luck.
     

  4. Separate them into different setup/category.
    Each has their own Kelly value.

    1. Bet each of the setup differently.
    2. Pretend u have multiple accounts, growing each of them individually.
     
    wrbtrader likes this.