Kelly Criterion & Risk Of Ruin As Risk Management Tool

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

  1. bpr

    bpr

    very hard to beilve a 90% win system with risk to reward 1:6
    u should be multibillionair already ??

    your system kelly is 88% half kelly 44%

    with 90% win
    2 consecutive loosers probability is 100%
    3 consecutive loosers probability 10% approx
    4 consecutive loosers probability 1% approx
    5 consecutive loosers probability 0.1% approx

    So u should take that into account instead of blindily going with half kelly

    20% per trade risk would be more appropriate.
     
    Last edited: Sep 6, 2019
    #271     Sep 6, 2019
    ironchef likes this.
  2. bbpp

    bbpp

    As I understand you already consider the factor my win is 3 to 6 times of my loss?
    The strategy was built during the past year and I did win some money but lost on other strategies I have been testing.As I am not sure it is the best strategy I can get.
     
    #272     Sep 6, 2019
  3. bbpp

    bbpp

    Last edited: Sep 6, 2019
    #273     Sep 6, 2019
  4. This is my opinion and you need to find what works for you.

    I find that making decisions on trade size should be based upon the system you are trading. You should rank the "trade-strength" based upon the system not some sort of gambling scheme.

    Again...The amount that you trade should directly correlate to your signal used.

    Es
     
    #274     Sep 6, 2019
  5. ironchef

    ironchef

    :banghead:
     
    #275     Sep 11, 2019
  6. 777

    777


    Few successful risk takers use full Kelly, though they often use fractional Kelly.

    In simulations, Kelly makes capital grow at the fastest possible rate with no chance of going broke. Consistently using more than 2x Kelly guarantees you lose money even though you have an edge.

    Full Kelly runs into many problems and here are a few:

    You may be wrong about your edge.

    You may be unsure about your edge.

    You can not keep reducing your bets/trades when losing because of opportunity cost or other factors.

    Expenses are the same as loses.

    The downside swings may not be suitable for temperament, especially as one becomes less sure of edge.

    Unexpected events such as loss of capital in system failures, fraud, cheating, etc, can be devestating.

    Sometimes people or groups have too much money to deploy full Kelly: blackjack table limits, limited number of shares at the desired price, etc.
     
    #276     Jun 24, 2020
    cruisecontrol and ironchef like this.
  7. ironchef

    ironchef

    Great comments.

    What I found was the uncertainty of my positive expectancy affected the Kelly #. Mine changed from year to year and therefore there was an uncertainty band around Kelly. Now I don't calculate Kelly when trading, just intuitively use a bet size of fractional Kelly.
     
    #277     Jun 26, 2020
  8. I thought according to Ralph Vince that Kelly was no good for trading when there were always different out comes possible. I believe he was adamant the optimal f was far superior for trading. Does anyone have any thoughts on this? Thanks!
     
    #278     Feb 4, 2021
    bluelou likes this.
  9. ironchef

    ironchef

    Trading is all about probability. A single trade can have different possible outcome, like a hand of blackjack or poker, governed by chance and randomness. But with enough trades and a large sample size, your method should produce an average win rate and R:R from which you can certainly compute your Kelly. Though unlike blackjack and poker, the expectancy may change over time so you have to update your Kelly periodically.

    I am not a professional and may very well be all wrong. You should consult a professional.
     
    #279     Feb 5, 2021
  10. :thumbsup::thumbsup:
     
    #280     Feb 5, 2021