Kelly Criterion & Risk Of Ruin As Risk Management Tool

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

  1. ironchef


    To me there are no bad advices, I read and listened to everything and everyone, then tried everything, discard those that did not work and adapted those that worked for me.

    Yes, I benefited because I had no risk management before and my trading/investment went through huge swings, both ups and downs. Risking 20% trading options instead of 100% seemed to fit ~1/2 Kelly so I am comfortable implementing that. Am I jumping the gun? No sir, I just lower my "risk of ruin" by a lot. Am I jumping the gun trading before knowing how to read charts? Probably, but I tried to compensate by lengthening my time horizon and using other structural factors.o_O

    Thank you for the coaching.
    #31     Jul 7, 2017
  2. ironchef


    I appreciate your comments because it showed you care.:thumbsup:

    How low should it be may I ask? As of today I am risking ~ 1% of my tradable assets on each option trade and I have ~10 open on average. I actually traded a lot more in the past but cut them back.

    I really want to learn how to read charts effectively, so this is my priority going forward.

    I promise you I am not going to be one that only talk and really get nowhere.

    #32     Jul 7, 2017
  3. ironchef


    I think you are too hard on us. There are many good people on ET, some may not be as good at trading as you but most are sincere, just like my college professors: Good at teaching but perhaps not as good at practice.

    A good student should take all the knowledge he/she learned from good/bad teachers and forged his own path and I am not talking philosophy here.

    #33     Jul 7, 2017
  4. ironchef


    I won't dare accept your bet sir.:D
    #34     Jul 7, 2017
  5. ironchef


    Thank you for your encouragements.

    Very difficult to understand your post but if I read carefully, there are pearls of wisdom hidden in there for me to pick. Thanks.

    The illiquid options are illiquid for a reason: Few players play there. Therefore not a lot of competitions except the market makers who are not betting one way or another. If my counter party is another trader, chances are he is a pro and trade against me because he is right and I am wrong.:(
    #35     Jul 7, 2017
  6. MrScalper


    Yes..but the key is being able to spot them right away..and be able to separate the wheat from the chaff!

    If all of your current open positions were to lose..what would your drawdown on account be..if all of your positions do not have a limited loss in the event of a gap up or down..or lock limit market..then you must state so?
    #36     Jul 8, 2017
  7. Mtrader


    Let me guess... you are not speaking about yourself. You are the REAL "expert".

    But that's what everybody thinks of himself.
    #37     Jul 8, 2017
  8. ironchef



    I found an interesting research paper on Kelly, in it was this quote by Paul Samuelson:

    Not unlike the situation encounter by a day trader or option trader. So what is a trader to do? Well, according to Kelly criterion, here is the Kelly answer:


    I used to trade like Pascal then intuitively reduced the size of my trade but Kelly will provide me a framework to find a criteria/size that is reasonable and that I am comfortable with.:finger:

    Next assignment for me is chart reading.:D

    Best wishes.
    #38     Jul 8, 2017
    comagnum likes this.
  9. Paul Samuelson actually advocated against using the Kelly Criterion. That's what made the use of the Kelly Criterion controversial in the academic circles.
    #39     Jul 8, 2017
  10. ironchef


    When I was in the Pascal mode, 100% of my tradable asset. Now, 10%. As for the other question, my longs are limited losses and my shorts are hedged or covered.
    #40     Jul 8, 2017