Kelly Criterion & Risk Of Ruin As Risk Management Tool

Discussion in 'Risk Management' started by ironchef, Jul 4, 2017.

  1. ironchef


    Actually, been there done that back in the 2000 and 2008 downturns. Gave up all the profits plus the principals too.

    I do know how important volatility and the greeks are in options. However, depending on one's method, knowing them is perhaps not as important in some cases: As an example, if I use long calls as a leverage on owning the underlying, once I bet on the direction, as long as the premium is less than paying for margin interest, I don't think the greeks matter. After that the trade off of margins call vs expiration is a no brainer to me.

    I don't want to be defensive, greeks are important and I will study them more thoroughly.

    It is critical to have a plan for the day when the fun stops. But how do I plan and what should my plan be, that will be my homework before Christmas.

    Merry Christmas to you.
    #161     Nov 30, 2017
  2. MrScalper


    when you get to the stage where it becomes boring.. you will then clearly see all the book and course sellers for what they really are..clever salesmen

    i can not say that i was any fact i was one of the biggest fools out there..but as you get certainly get wiser..and there comes a time when you will look back and laugh at how silly you were..and how silly it all still is

    making money is not that hard.. holding on to it is a different story!!

    golden rule..always put money aside for the rainy if you risk too much..for whatever reason..then if you get caught you are fucked up..out of the game for good..and no matter what you have learned thru experience will be worth jack shit :)

    keep it simple..know your market..never over trade..never get those in need..and always be kind to do not have to be kind to humans who are not kind to you :)
    #162     Dec 2, 2017
  3. ironchef


    I am digesting your post slowly.

    Trading is boring? Far from it, meaning I still have a lot to learn.:(

    Making money is not that hard? Are you kidding me, it is very very hard for me.:banghead:

    Golden rule? Yes sir.:thumbsup:

    Keep it simple? Absolutely, no fancy combination options and complicated TA on chart reading.:thumbsup:

    Over trade and greedy? Probably, need to work on those.:(

    Be kind to animals? I love animals.:thumbsup:

    Do not have to be kind to humans who are not kind to you? I don't think I am going to answer this one.:finger:

    I do have one more comments on chart reading:

    Thanks to you I am getting quite used to include reading charts before I trade and appreciate that they provide useful information for trading. :)
    #163     Dec 4, 2017
  4. MrScalper


    don't mind the idiots who say they trade without charts..that is like saying I drive without always watching the road..sure you will get there..but one day you will not :)

    btw..a chart is a chart is a not an accurate can it you have different players with different reasons and intentions

    a chart is but an historical graphical representation of can not predict the future no matter how many fools you listen to!!!

    as with any see what the painter is portraying takes time.. appreciation..and dedication.. those high earning art valuers do not earn the big money takes years of experience and above all else..a good "EYE" :)

    think like a fool
    stay off the stool
    open your EYE
    then limit is SKY

    to make it SEE
    think buzzzzy BEE
    his glory might
    be SCENT and SIGHT :)
    #164     Dec 5, 2017
  5. ironchef



    I see a chart like a painting that is being painted right before my eyes. Sometimes I could recognize the subjects but often I could not. Like you said, it takes time and skill to "see".

    Seasons greetings to you and everyone, and a special word of thanks to those who helped me over the years.
    #165     Dec 6, 2017
  6. MrScalper


    no need to thank anyone Mr the only person who can really help you is yourself..but..if it makes you feel are welcome :)
    #166     Dec 6, 2017
  7. ironchef


    The thing I appreciate is you pushed me to think out of the box and take a look at charts differently, no longer from the "rear view mirror" but "follow the road". Perhaps it is unique perhaps not but that does not matter.:finger:

    I have some successes with GILD, TEVA, IBM and GOOGL since, by timing the trades with charts.

    Maybe it is just luck and one day the beginner's luck will end. But while things are good, I continue to lighten up and take chips off the table, remembering the lessons of 2000 and 2008.

    #167     Dec 21, 2017
  8. MrScalper


    the key is clear
    when crowd do cheer
    as most no brain
    like runaway train :)

    the past can show
    what others know
    but to foretell
    sure way to HELL :)

    this thing called GOLD
    is rarely told
    but it can show
    what others know !!!!!
    #168     Dec 21, 2017
  9. rvince99


    The Kelly Criterion is just a postulate. Kelly (and Graham as well as Shannon, both of who signed off on the paper) solved for this supposed asymptotic growth-optimal fraction in the 1956 Bell Labs paper, despite the fact that they thought they did solve for it. Actually, they solved for something else. They deluded themselves as they were solving for a subset of problems, the answer to which equaled the asymptotic growth optimal fraction in the narrow cases they were concerned with! Yet people accepted it as fact and still mistakenly do.

    The first one to solve for the asymptotic growth optimal fraction was Thorp with his "Kelly Formulas," closed-end formulas for solving for the asymptotic growth-optimal fraction for binomially-distributed outcomes.

    The Optimal f formula I put forth in the late 1980s does solve for the asymptotic growth-optimal fraction, for one or more simultaneous propositions (portfolio components/systems/markets). But it too is asymptotic, that is, it is a fraction approached (albeit very quickly) as the number of trials/trades/holding periods increases.

    Consider however a game with a positive expectation where you wat to determine the expected growth optimal fraction, but you are quitting after only one play? In such cases, the expected growth optimal fraction, the Optimal f value is 1, or risk 100% to maximize your expected growth after one play.

    It's actually a little more complicated than this. Assume a p=.1 to win 10 units and q=.9 to lose 1 unit. Though there is a positive expectation, it is a game you should not play if you are going to quit after one play. Similarly, if we have a negative expectation game with p=.9 to win 1 unit and q=.9 to lose 10 units, and you wish to maximize your expected growth, quitting after one play, your Optimal f = 1, or risk it all on the one play. The Kelly Criterion, even Thorp's Kelly formulas for these binomial outcomes give you entirely different (and incorrect) results.

    I refer you to my paper on this at

    This will give you what the expected growth optimal fraction(s) are for one or more simultaneous propositions, for 1 to infinitely many trials.Further, there are other considerations, such as the fact the there is a cost of funds involved (trades don't transpire instantaneously in most cases), etc.

    Anyone who has used "Kelly" with success has been using something that is mathematically incorrect, and the success may in many cases be attributable to luck (you cannot determine an expected growth optimal fraction for most capital market situations with any of what has been referred to as "Kelly," nor can you even apply it, correctly mathematically to the game of blackjack, and favorable results garnered from such were done so with grossly inaccurate calculations).

    Finally, all of this assumes your criterion in trading is to be expected growth-optimal, all else (including drawdown or other risk measures) be damned. This is ok provided that really is your criterion.

    Since the actual Optimal f value (or value sets) exit between the bookends of 0 and 1, there are other points of geometrical interest within that manifold. Further, everyone in every assumed proposition or set of propositions exists within that manifold,unwittingly in most cases, and are covering paths through it, unwittingly again in most cases.They are paying the consequence and reaping the benefits in terms of performance characteristics that these various points of geometric consequence (aside form the peak, the Optimal f points) imbue. In fact, various points and paths in this manifold can be constructed to satisfy ant trading criteria. It really is not very complicated -- I'm not trying to sell anything, razzle-dazzle anyone, but rather to edify this area that is always misunderstood.
    #169     Jan 6, 2018
    Xela likes this.
  10. themickey


    Thanks Ralph. Do you have that formula online somewhere as a calculator?
    #170     Jan 7, 2018