Simple? I beg to disagree sir. If you have a simple problem like a coin toss. For me, when the win rate and R:R are variables or time dependent or difficult to pin down.... I found it a very difficult problem. I think that is why pros like Ed Thorp only traded with fractional Kelly (~1/4 to 1/2)?
The best position sizing method is based on trades. So look for your setups and when you got a rare but very, very good setup then just risk more on this trade. For me the most important is that I look on each trading setup and define how good it is ex ante and then I look at the percentage risk I am gonna take on that trade. Because as long as you have a looser the best size is zero then or not to trade. But as long as you win in a trade the best size is all in. So focus on trading setups is most important. Do not get too destracted but all those position size formulas, as most of them were created on the casino games where every outcome is same ex ante based on its probabilities, which is totally different from trading.
In a strategy where you have fixed Tp and Sl and you know the possible outcomes you need to use a position sizing formula of some kind to minimise risk. Personally I say using a fixed amount in Dollars (or whatever currency you’re trading against) per entry will be the most predictable and compounding every trade on paper and backtesting looks achievable but it is very much dependent on luck. You also have a growth ceiling which you can’t overcome. For example your strat may be telling you enter with 50% but that 50% is ridiculous for the liquidity on the market and will cause a lot of slippage, if it is even filled.
Trying to size based on winning percentage is a flawed method imo. The Sharpe ratio is the better method for sizing. However, how many of us are really going to go through all these calculations anyway lol. Most of the time I'm just trying to get the trade in before my tuna melts are ready! If I do bother, like sometimes I want to check a position before (or after) averaging down, I use a variation of the Sharpe ratio where I calculate how much of my capital allotted is actually at risk based on 1Sd, and what return on that risk I am getting, instead of return on total capital allotted.
Another wxy? Are you related to @wxytrader? Any way, I don't understand your points. Kelly determines bet size based on a very rigorous mathematical analysis & formula. How do you determine bet size from your Sharpe? For example if my Sharpe is 0.5, what should my bet size be? Thank you.
Sharpe works well for capital allocation when you have multiple assets/strategies and you want to allocate capital between them. I don’t see it as a way to calculate position size of a singular asset/strategy.
Question for you: If I have two trading strategies, one produce a Sharpe of 1.0 and the other 0.5. Both have the same Beta. Why would I allocate capitals to trade the 0.5 Sharpe?