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Kelly Criterion & Risk Of Ruin As Risk Management Tool

  1. Anyone uses Kelly Criterion/part Kelly, or Risk of Ruin as risk management tool?
     
  2. Yes.
     
  3. May I ask:

    1. How?

    2. Works better than the traditional stop losses, etc.?

    Thanks.
     
  4. The Kelly criterion lets you determine the optimal amount of leverage which maximizes the long term growth of account. There is a lot more to it, as this maximization of growth comes with a very heavy penalty in terms of volatility and drawdowns. But essentially, this is what it's for: to figure out what leverage (i.e. position size) to use for every trade.

    The Kelly criterion for the cases involving two outcomes (a fixed-percentage loss or a fixed-percentage gain) is pretty simple, and can be solved analytically. If there is a continuous spectrum of outcomes (such as it is in trading), it can be solved numerically.

    Given a series of historical returns (from a trading system, for example), the Kelly fraction is determined by maximizing this quantity:

    G = Sum(Log(1 + r * L))
    where
    L is leverage
    r is a return (such as a daily return)
    Sum is a sum of of the Log(1 + r * L) quantities for each return r

    So, you successively increase leverage L until the point when G becomes the highest. That gives you the answer L, which is the leverage. Beyond this value of L, as your leverage becomes higher, your total return actually becomes lower. Thus the term "optimal leverage" (aka Kelly fraction).
     
  5. Thank you nonlinear5.

    So, Kelly does not minimize "ruin" and is good for someone with deep pocket. In general, should one "bet" using fraction Kelly, like 1/2 Kelly 1/4 Kelly?

    Can one numerically, i.e., using Monte Carlo to simulate risk of "ruin" using various fractional Kelly?

    What about "risk of ruin" in probability? Is that a good risk management/bet sizing value?

    Regards,
     
  6. Anyone uses Kelly Criterion?

    Yes - I use my version of it modified for trading equities & ETFs as opposed to gambling which it was intended for. Max position size is 20% of capital (no margin loans!). I break each position into 4 separate trades of 5% of capital - layering in - adding only to winners. This keeps my loses much smaller than my winners and still allows for the equity curve to have stellar winning years and small draw downs on losing ones (<7%). My risk per trade is just under 1% of capital.
     
  7. I set my overall system risk target with an eye on Kelly. I'm running at about a quarter Kelly (25% annualised risk target versus a backtested Sharpe Ratio of 1.0).

    I also size my bets proportionally according to inverse volatility (Kelly... but also Markowitz) and according to forecast strength (a.k.a. perceived 'edge')

    GAT
     
  8. My futures trading system is based on the system as explained by @globalarbtrader in his book. This includes a Kelly analysis to determine bet sizes. I use 25% annualised risk target.
    I wanted to use the same "bet size calculation" for another system, which uses ETFs instead of futures. However, my account is not large enough to run at 25% risk (or, in other words: the ETF volatility is not large enough to reach 25%). The position sizes in the ETF system are therefore limited by account size, not by risk volatility.
     
  9. Yea I used to run at 25% which maxes the gains but trimmed down just recently after I read this from Ed Thorpe - not willing to go down to %12.5 like he suggested but than again he has a huge amount of capital to deal with.

    Are you layering in to a position or going all in at once?

    if you bet half the Kelly amount, you get about three-quarters of the return with half the volatility. So it is much more comfortable to trade. I believe that betting half Kelly is psychologically much better.

    https://betyourbeliefs.wordpress.com/2017/02/27/ed-thorp-jack-schwager-and-the-kelly-criterion/
     
  10. The futures system I'm referring to in my previous post is using something which you call "layering". It determines an amount of "confidence", or "strength", or whatever you would like to call it. If this value is higher, is a larger position size used. If this value is lower, is a smaller position size used.
     
  11. The depth of the pockets is not part of the Kelly equation. If you bet twice Kelly (even with a profitable system), you are mathematically guaranteed a ruin, no matter how much money you have initially. That's because the Kelly bet is always proportional to the size of the account. Quarter Kelly is a reasonable leverage.

    Yes, you can. I believe these figures are invariant to the system. For example, with full Kelly, you have a known 20% probability of losing 80% of the account.
     
  12. %%
    In other words; less is more.
    I like the martingale dog collar. Meaning what?? As an example ,its a dog collar that gives the dog or profit a bit more slack, so as not to choke the dog or profit.

    As far as math , i like IBD[ Investors Business Daily] founder math; risk $3 to make $8, or more. But that is in context of a cash market+ 250-450 page system.
     
  13. Thank you all. This is really eye opening for me.

    It is actually counter intuitive to me: For the longest time, I had always been "all-in", i.e., 100% of my investable assets were in equity, zero diversification, wrongly belief that to maximize profit or outcome I need to go all in. As a result my net has always been extremely lumpy, huge ups in bull markets but also big draw downs in bear markets like 2002-3 and 2008-9. Finally, this year I started to think about risk management and came across Kelly.

    I now appreciate why the experience traders at ET all telling the new kids to not risk more than 1-2% on each trade. The "risk of ruin" is very real.
     
  14. Another couple of questions for you:

    1. I keep a record of all the outcome of my options trading, can I then use the record to do a Kelly sizing simulation (I can do that using Excel) and find the best Kelly size for my system? And can the Kelly size tell me my system's edge, i.e., if it is .2 it is better than a .1 system?

    2. Can one determine trading edges by calculating the Kelly of one's system when backtesting? If so, what should one look for in a Kelly for developing a system?

    Thanks.
     
  15. Thank you again sir.
     
  16. But many great investors, like Soros, Druckenmiller, and the fellows in the book "Big Short" advocated and went "all in" on their trades? Survivor bias?
     
  17. Yes, as well as other things...
     
  18. Although well-intended, I believe that this advice is even half-correct. You don't want to base an investment size on its cost price but on the volatility of that cost price. You want to size the volatility on the size of your account. So a better way of saying it, at least in my view, is that a position size should be such that its value volatility is 1%~2% of the account value.
     
  19. Total waste of time and effort!

    Your risk should be determined by your market of choice..your strategy..your investment horizon..and last but not least..by your available capital!

    Kelly..and such..are of no real value to the small retail trader. I will be very surprised if you get anywhere with this..but I am often wrong :)
     
  20. Yes.

    No, it works the other way around. Your system edge (as determined by the distribution of trade returns) is the input into the Kelly equation, and Kelly fraction is the output.
     
  21. We give 2 traders $100k each and let them at it for 1 year.

    Trader 1 does 1,200 trades and makes $10k.

    Trader 2 does 50 trades and makes $25k.

    If you were given a choice to back one of the traders with your money..what trader might you back?
     
  22. Not enough information to make a decision. You provided the cumulative returns, but no risk (such as the distribution of drawdowns, or at least the standard deviation of returns).
     
  23. To survive for 1 year making 1,200 trades, trader 1's trades must be very small in size so his risk of ruin is likely very low. A $10K return on a risk adjusted basis should be superior. If I were a conservative type, I would bet my money with trader 1.

    Well, just a WAG MrScalper, what do I know.:D

    Best wishes.
     
  24. Come to think of it, yes, you are right again.
     
  25. Trader 1 has 50/50 win/loose with max drawdown of 10% capital.

    Trader 2 has 40/60 win/loose with max drawdown of 20% capital.

    Neither has a fixed % risk per trade.
     
  26. The one who understands the Kelly criteria.

    GAT
     
  27. Neither ever head of Kelly criteria!
     
  28. :)
     
  29. Mr ironchef..you stated that you have received "good advice" in relation to risk management that will help you improve your results. Do you not think you are jumping the gun?

    I will predict here and now that you are wasting your time on such "stuff". The only thing you need to do is keep your risk per trade very low until you have gained adequate experience in relation to trading..if you do not include chart reading skills in this adequate experience..then you will just end up like the rest..talk about everything and really get nowhere.

    The web is full of "experts" on just about anything you can talk about..but of course most are using the web to live out their fantasy worlds!

    I bet you that you will not prove me wrong..do you accept the bet :)
     
  30. %%
    I like Mr Druckenmiller[ mispelled his name Drunkenmiller LOL, correction]. But his famous quote['' It takes courage to be a pig,LOL'' ]can get BIG trends + blow Up accounts. But one reason i like him/Jack Schwager is he disclosed he blew up a[leveraged] fund of his...........................................................................

    Actually Ironchief ;a lot/many funds, like long only mutual say fully invested // 95% + more invested; not many bow up =not leveraged/margined + maybe 100 or 500 stocks........................................................................................................

    Beside$, I remember Mr Druckenmiller had real good work habits + worked real long hours for a long time. So if 5% do big trends well+ 95% blow up because of [ ''It takes courage to be a pig''LOL] Proceed with caution...........................................................................

    And a lot of it[risk %] depends on the market; i did , for decades+ could risk a big % in home improvement business, wisely, because as long as i did not abuse the privilege; bid/ask was the same[ In the sense i could take lumber-paint back if a client canceled + get 100% of my money back] -they did not enforce a 10-15% restocking charge even they could. [the sign said they could charge a 10-15% restock charge]. Options are not very liquid; even though some can be...........................................................

    Losses are a business expence,, less is more,;
    but no such thing as busines$ without business expences
     
  31. 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.
     
  32. 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.

    Regards,
     
  33. 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.

    Cheers.
     
  34. I won't dare accept your bet sir.:D
     
  35. 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.:(
     
  36. 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?
     
  37. Let me guess... you are not speaking about yourself. You are the REAL "expert".


    But that's what everybody thinks of himself.
     
  38. MrScalper,

    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:

    upload_2017-7-8_5-33-55.png

    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.
     
  39. Paul Samuelson actually advocated against using the Kelly Criterion. That's what made the use of the Kelly Criterion controversial in the academic circles.
     
  40. 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.
     
  41. Yes, from what I read. But Nobel Laureate can be wrong too.

    Best to you.
     
  42. Again, don't be too critical, he is right. I followed both your posts and I think both you and MrScalper are experts we can learn something from.

    There are many real professionals and experts here but also a few not quite knowledgeable. It is up to us readers to filter out the noises.

    Regards,
     
  43. That is not the answer..do you know what your max drawdown can be?
     
  44. No real use to the retail trader!

    Simple spreadsheet will suffice.

    All the risk management in the world will be of no benefit if you do not learn what is required in order to profit in a very challenging game!

    You must seek out, find, understand and be able and willing to implement what is required.. otherwise the chances of making any money worth talking about are zilch!
     
  45. I know what I know..but I can never know the unknown unknowns :)
     
  46. No.

    2002-03 and 2008-09 were very painful years for me but I survived.:)
     
  47. Agree.
     
  48. So..you admit that you do not know your worse case scenario..that is very dangerous.

    Some years ago I made a good deal of money with options trading..and like you I started to over-trade!

    One day I found myself looking at the ES market depth in a lock limit down market..it was an experience I will never forget..and it cost me a good deal of money..but..mostly due to panic..so..make sure you know "exactly" what you need to do when..not if..the shit hits the fan :)
     
  49. There is no certainty in trading, so nobody knows their worst drawdown.

    The only way out is to put fix stops and a max of losing trades in a row you accept, and even then you are no sure.

    Your biggest drawdown is the biggest till a bigger one appears.
     
  50. Not correct..if you buy options your max loss is the premium you pay..no need to extrapolate!

    Daytrading also allows an astute trader limit losses.. unless of course he is a "daydreamer" :)
     
  51. I am afraid that is correct. My equity holdings are not hedged and without stop losses. So, theoretically I can lose everything. But I have not hedged or put stop loss on my equity holdings for as long as I remembered. Recently I tried stop loss on AAPL, FB and BABA with very bad outcome so I essentially stop doing that.

    You probably will say I live dangerously.:D

    I am having a lot of difficulty reading charts and try to find order out of what seemed random ups and downs. Oh well, I will keep trying since I don't have a day job and have plenty of time on my hand.

    Cheers.
     
  52. Are you trading shares..options..or both?

    If you are trading shares..buy and hold..without stops..then that is a very bad habit to get into. It is fine to trade with no stops when daytrading..as you can be in total control and react to what price is doing..not for the wishers and hopers :)

    What are you looking for when you look at a chart..if you don't know then why are you even looking?
     
  53. I day traded shares in the early 2000, switched to swing trade shares very quickly but since 2013 exclusively trade options.

    For me, trading options means directional bet so entry is critical. If I can get a better entry from reading charts, it should improve my results.

    Regards,
     
  54. I trade only futures so was thinking about that, not options.

    But even in options it is true. You only know the drawdown of 1 entry, which is the loss of the premium you pay. But you never know with certainty how many losses you will have in a row. So options trading doesn't solve that problem.

    You have to follow the rules of your system, which means that you have to take every trade no matter what the total outcome till then is. Stopping after a huge drawdown is no solution because when you start to trade again the risk just continues and the drawdown can continue too. Only stopping to trade for ever can solve the problem.
     
  55. Can you post details of one option trade as follows..

    Underlying
    Month/Date
    Strike
    Call or Put
    Premium paid or received
    Date and time of entry
    Projected hold duration


    If the trade has 2 legs..then details for both legs are required.
     
  56. We are talking about current risk with current open positions..not future trades!
     
  57. So in futures ES there is no current risk and no open position????? :wtf:
     
  58. Are you drinking alcohol or what!

    Go back and read the posts..as I do not repeat myself :)
     
  59. I don't trade AAPL options. Here is one long (I also traded other longs and shorts at the time) trade I made in June:

    GILD
    Jul 14
    $64.5 (~Around ATM)
    Long Calls
    ~Around $1.50
    ~Around mid Jun
    I plan to use the proceeds to buy some underlying and own them long term.

    I had been watching GILD for about a year and decided to pull the trigger ~$65 per share mainly based on fundamentals.

    Right or wrong this is how I trade. I incorporated part of the philosophy and concepts of Handle123, drcha, among others (those kind enough to answer my questions) into my own methodology.

    I tried to study monthly, daily, 30 min, 5 min, 1 min and even ticks GILD charts for good entry signals but it was difficult to discern which and what are the correct entry signals since there are so many and real time is so different from backtest.

    Regards,
     
  60. Does this mean you are still long the Jul14'17 64.50 Call from $1.50?

    What makes you think GILD will not pull back more before expiry..and why are you so certain that you will be able to use the "proceeds". Do you know something that we don't?

    upload_2017-7-10_18-39-9.png
     
  61. Always be aware that anything can happen when trading!

    GILD can go sideways..up..or down..no one knows for sure and the only thing we can do is control our risk!

    Let's see where it ends by Fri 14th ?

    DO NOT change your plan based on what I post..as I really haven't a clue where GILD will be by Friday !!!!!!!!!!!!!!!!!

    upload_2017-7-10_19-9-14.png

    upload_2017-7-10_19-16-23.png
     
  62. Yes, a paper profit of ~$3.4 per share as of today.

    No I don't. I read the same news, read the same 10K, analyst research, annual reports as everyone. Maybe I dig a little deeper, reading up on clinical trial of their pipeline drugs, their lawsuit....:D
     
  63. Questions for you MrScalper:

    From the daily chart, in real time, could you see any sign the stock would pop/gap up?

    For me I had a target of $65 from fundamental and when I saw thing stayed at ~$65 for almost a month, I thought that meant it might be bottom so I moved.

    Or, say today going forward can you tell if the price would go up or down from reading the chart?

    Thanks.
     
  64. A chart can not predict the future..no matter how hard one tries..how can it!

    What one can do..is try to see what some of the big players are doing..and what they might be thinking..but..as people change their minds very quickly..and thus can act differently..it really can be hit and miss..BUT..certain things can yield better results than others when acted on..so..the key is obviously in your ability to act on relative information..like you did not do when the option premium peaked at over $6 or so.. can't remember exact peak figure..but why did you not react..are you the greedy type..or where you not following the market.. either way it is bad trading!
     
  65. The OI for that strike is 15 contracts..so you are not holding any more than that :)

    Closer to expiry means faster time decay..yes!

    Break even point is around $66..yes?

    Current price is $69.29..yes!

    What is your plan for today..or do you plan to do nothing and hold till expiry?
     
  66. So, I cannot use charts to predict or forecast the future price move?

    I still cannot see how charts can tell me how the big players play. For the life of me I could not tell - All the after the fact chart reading (e.g. AAPL and BRK buying, they hided a $10B purchase well). Anyway, I will continue to stare at charts for the foreseeable future because I do believe the info are there, just like in communication theory, one can apply filters to filter out the noise and find the very weak signals.

    In any case, my sense is there are two type of traders: those using qualitative and intuitive methodology and those used quantitative. For me, I have to quantify before I move and I don't know how to make quick moves, being deliberate all my trading career.

    As for GILD, I need to think through, make my analysis then move. I am not going to discuss what I do and how, why I make my move but I think the odds are in my favor that I will come out ahead.

    Thank you for your coaching especially patiently took the time to answer my questions.

    Regards,
     
  67. I do want to bring this thread back to Kelly as I think lots of you folks are using Kelly and seemed to believe in it and it seemed to do the job for you. Thank you for the coaching.

    Personally I benefited from understanding Kelly and I am now able to quantify the risk level I should undertake and so far using it based on my trading outcome seemed consistent.

    To MrScalper, I appreciate your comments but I believe Kelly do have a place in a small retail trader's (me) bag of tricks.

    Risk management is counter intuitive for someone trying to maximize returns. But my frustration in the past with risk management was most I read here on ET were qualitative, hand waving and no one could explain how to manage risk other than general statements like don't risk more than 1% of your asset on each trade, trade small and trade often (tastytrade), risk management is THE ONLY EDGE....

    The reason it did not make sense to me was no one could tie it to returns, win rates, R:R... If my trading success is 50:50 and R:R 2 - 1 my risk level is definitely different than someone at 70:30 and R:R 10 - 1. It just does not seem right that both use 1% risk capital?

    Special thanks to nonlinear, comagnum, globalarbtrader, HobbyTrading for your insights. My guess is you are all professional traders. nonlinear, from your name you must be an option trader and you understand convexity. :thumbsup:

    MrScalper, thanks for bringing up an alternative view point.:thumbsup:

    Further comments, suggestions are welcome.
     
  68. Thanks for your kind words. I don't know about the others you mention (except @globalarbtrader), but I'm not a professional trader and never have been. I tried to select an appropriate handle name.
     
  69. Today:
    upload_2017-7-12_9-20-58.png
    I think it is bullish going into Friday but I am just guessing and follow TA talk that says there is "support" at $69+? But how do I know if the big guys are buying?
     
  70. I am small retail but I am trading options full time meaning I have no other jobs that keep me occupy.

    Fun but very very very challenging. I try to incorporate things I learn into my trading tool kits.

    Most of all, I avoid trading with/against the pros.

    Regards,
     
  71. As I said..do not go on what I say :) or anyone else for that matter..go with what works best for you.

    Risk management is a requirement..not an edge in my understanding!

    An edge is something like being in the right place at the right time..and being willing and able to act as required..plain and simple!

    Effective chart reading takes a long long time..and even when it is pointed out to you it still takes a long time for it to eventually sink in..why..well..again it is down to the individual..but most who try their hand at this game..including yours truly..do not have the required experiences when starting out..how can we!!

    I will leave you get on with Kelly and his like..if nothing else they will allow you to stay in the game..hopefully long enough to see it for what it really is :)
     
  72. if it is real, and I hope it is, then I will get it eventually. I am actually beginning to see something in longer duration charts, or, maybe just my imagination or mirages.:banghead:

    Anyway, I will try a few swing trades using those and see if they are real.

    Thanks again.
     
  73. Final report card:

    Just to let you know that GILD is now a long term holding for me. I am not a pro just a small mom and pop retail trader, so we are talking small potato.:D

    In the mean time, I keep staring at the charts, everyday, in real time. Still no light bulb turning on in my head as I am still unable to predict the next price move from the charts with any level of certainty, just noise.

    Thank you for taking the time to answer my thread.
     
  74. No problem, I was just pointing out my opinions in relation to what can work best for some people. This in no way means that others can not make money using different approaches. The only thing that matters is the bottom line..if positive then fine..if negative..then clearly changes are required.

    There is no one answer that suits all, but there are definitely some ways that are much easier and less riskier than others..it is up to each individual to find out how much they want to..but one thing is for sure..same as as line of work..no pain..no gain. This easy money thing is just an advertising gimmick to get gullible people to part with their money..nothing worthwhile is ever easy!
     
  75. I just want to make another comment on chart reading, again let me use GILD as an example since this is a real trade:

    The analogy of studying charts is like studying a foreign language. What I need is to find my Rosetta stone. Watching the GILD price/volume unfolded in real time after the initial breakout, I developed a sense of the collective market's view. There was an exit point where I could make a nice profit if I intend this to be a short term trade but based on my analysis of where things are with GILD I am keeping it for now and shorted some options instead.

    Another question for you sir: What is your view of GOOGL at the current price level for swing trade options based on chart patterns? I went long Friday but not from chart patterns.

    Thank you for your patience in staying with me.

    Regards,
     
  76. Volume can be misleading at the best of times..it can be worth watching for very short term trading with T&S..and more importantly..if the last trade has gone off at the bid or ask price..and where the bid/offer is now at..you have to set it up and watch it to see how it can be of value for timing entries and exits!

    GOOGL..wouldn't touch it with a barge pole..why take on more risk than you have to:)

    upload_2017-8-18_21-1-16.png
     
  77. Appreciate your opinion. You are right again.

    Regards,
     
  78. It really does not matter if I am right or wrong..but yes..my opinion might be useful for some..and useless for others!

    One thing to ponder..C.R.R

    Cue.. Routine..Reward

    It pays to read good material..as there is a lot more to making money than just buying and selling..I know I said all you need is a simple Bar Chart..but that is just a part of the big picture.. that comes under the Cue part..your next part is very important..and most who try never get it right..which leads to a negative reward..thus forming the bad "you know what"!
     
  79. My long GOOGL options are quite profitable as of this morning. I am setting a mental stop if the underlying goes below $920 but will let the position develop because I think I see a pattern on the daily chart (or maybe just my imagination/wishful thinking), if that is what you meant regarding chart reading.
     
  80. No. The Kelly Criterion assumes the existence of a utility function, but then proceeds to maximize the growth of the bankroll. If we modify this to correct the inconsistency, then we find that the Kelly system does not "outperform" other systems. It is just one of many possible systems.
     
  81. Personally..I think you are mad if you are willing to have a $35 stop with realized paper profit..I would move stop to $952 and see what happens next..it can of course do anything..which is why monitoring and adjusting is the best approach.

    Chart reading skills can be more advantageous with short term trading..as your "wiggle" will be smaller..which equates to less risk..but no matter what timeframe you use to make trade decisions..unless you have a way to repeat what you are doing..over and over..then I think it will be very hard to get any consistency.

    If you see several small bars..then..there is a very good chance you will see a wide bar soon..and..when you see a wide bar..or..several wide bars in succession..there is a very good chance that you will soon see several small bars..the key is not predicting the direction..it is.. trading the action..for which you need..control

    You appear to be doing well..if you get a few more small key skills..and use them..there is no reason why you should not do exceptionally well..I would be worried that if we get any sizable move down you will be hit hard..and you are going to get back into the "hold" way of thinking..which..is not where you want to be if you want to get anywhere near exceptional returns..remember..if you do not have a plan of action for each scenario..up..down..or sideways..then..you really are gambling..and you know where gambling gets you in the financial markets!
     
  82. No disagreement with your statement. For someone who was always "all in" with very large trade size (bet the farm approach :D), 1/2 Kelly is a great improvement in risk management.

    What other systems are you refer to?

    Thanks.
     
  83. You may be right. One time I mentioned on ET I let a WFM option went from up 100% to zero because I waited too long.

    But I had been stopped out (picked off) too many time using trailing or hard stops so I no longer use them. The problem with mental stop, often it is really difficult to pull the trigger.

    By the way not having a trailing stop worked for GILD (now @ $83,74 and if I set a trailing stop, I would have been stopped out at either $68 or $70 and probably won't get back in).

    As for GOOGL, I will use it as my first real money chart pattern exercise to set my exit instead of using a stop and see where it takes me. Perhaps a very expensive exercise?:sneaky:

    Regards,
     
  84. Very good advice and thank you for the tips on chart reading.

    Best to you.
     
  85. In general... due to the fact that it is impossible to predict the unpredictable (we can estimate the exact risk only after the event has taken place), I use several systems at once. The main one is paid signals. But it all depends on the market condition. The combination of signals pointing in one direction is important, especially when you are holding a position.
     
  86. Thank you.
     
  87. I also use different estimates of political risk political risk BERI, PSSI, Knudsen's model
     
  88. I have no idea what they are, way beyond my pay grade.o_O

    I think it is better I stay with my Kelly, keeping things simple but thanks anyway.
     
  89. :D
     
  90. If I did what you said I would be out of my position yesterday with a nice profit. Putting GOOGL and Nasdaq charts side by side, I can see why $952 make sense as a stop. All things considered very good call.

    Was going to do that but then decide to wait, why? Now that I am practicing chart reading, this is a real money exercise to see how chart reading works.

    Thanks again.
     
  91. Reread this paragraph a few more times.

    What you are saying, boiling down to the very basic, is that stock movements are not random. Because if they are random, like coin toss, the probability would be 50/50.

    So, you have just given me a homework assignment to look at movements. It is an easy back test exercise.

    Thanks.
     
  92. I haven't been following this thread super closely, so I hope I haven't interrupted some type of sarcasm, etc. :)

    Also consider the following hypothetical:

    Suppose there exists a stock such that it only moves up six days, then down six days, then up six days, ..., etc., in that same pattern, continuously.

    Such a stock would have an equal number of up and down days as the total number of days approaches infinity. And thusly, would indicate a "50/50" probability.

    Now, ask and answer for yourself: Is the stock's movement random?

    Conclusion:

    Probability does not necessarily determine whether a series is random. :)
     
  93. Very good points.

    There are many mathematical ways to measure randomness and if after I use all of the known randomness measures, the outcome conclusion is a high probability they are random, then they are probably so. Yes, with a probabilistic problem, there is no one absolute answer.

    Thanks for your comments.
     
  94. Time = Money

    Time can mean different things to different people..but..in financial trading it can only mean one of 3 things..ABC..or..123 :)
     
  95. If you are willing to stay up tonight..you might make some nice money :)

    upload_2017-9-4_0-30-2.png

    upload_2017-9-4_0-33-50.png
     
  96. Based on what you see on this chart, how do you suggest to play it?
     
  97. Simple really..but..it all depends if you have the TIME :)

    upload_2017-9-4_0-36-21.png
     
  98. Exactly.. the range... but I thought maybe you would share your thoughts on which way it would break. My answer of course is that its too early to tell.
     
  99. It does not matter what way it breaks..this is why so many fools lose so much money..we are outa normal market hours so anything can happen before the open tomorrow..if you have the TIME..then there is no reason in the world why you shouldn't be on the right side of the open by tomorrow morning..if I say the gap will be filled..i might be right..but I also might be wrong..all that matters is that little box :)

    upload_2017-9-4_0-42-6.png
     
  100. You should teach... you sound like the experts who have lots to say but say nothing at all! :D

    You can't say there is no reason why a person can't be on the right side of the trade by the open, but then also say that it might fill the gap or it might not. You're essentially covering all bases, hence not really saying anything at all, but trying to sound smart by saying its likely to be on the correct side of the trade.
     
  101. Now it is time to make it bigger so you can start to see more clearly..as we are outa hours it can move very quickly..so..not really for those with limited funds and scared money..the 1 min can suck you in..but it can also save your bacon..it all depends on what you see when you look at the chart..ES is not to be messed with..but with proper risk control is nothing to be scared of either!

    upload_2017-9-4_0-51-9.png
     
  102. Keep doing your excellent play by play of the action after it happened!
     
  103. I can say whatever I like :)

    Thing is..if you think you know where it will go..then you really are just fooling yourself..but..if you do not know how much you will risk in order to make so much..then..you really are a fool..this trading stuff is all smoke and mirrors..just pay full attention to what is actually happening..and TRY and workout who is now in control..the buyers..or the sellers..or..are the just pissing about waiting for some "news"!

    upload_2017-9-4_0-59-52.png
     
  104. Well it does take a few seconds to take a screenshot and post..so..yes..you are 100% correct..the same as your trading..you banana eater :)
     
  105. :D

    upload_2017-9-4_1-3-27.png
     
  106. I do agree with this. But it sounded like the the point you were making was to go long once it left the tiny range, and in my opinion, the breakout is the worst place to go long. This is obviously what is happening now, since it did a fakeout. Likewise, going short below the range is tricky as well, but at least you can say it failed going higher. Anyway.. I'm off.
     
  107. I saw a slow up trend, after the fact, so I really don't know how to use the info.
     
  108. Come to think of it you never gave me any hard and fast rule on what to do either, leaving it to me to figure out on my own. One difference: Yours free, and helpful in certain aspects.:finger:
     
  109. It just so happens that I came across CW..spoke with him on many occasions..and met him once..there is more to the story..so stay tuned..as I will give you the big picture..then.. you can make your own mind up!

    Needless to say..never part with your money for training or guidance..as..it really is not required..but..you can still learn a lot from others.. providing you approach them in the correct manner..and are able to quickly determine if what they are saying is true..or..bullshit!

    Most on this site talk bullshit :)
     
  110. It sounded the way you wanted to hear it..I did not say buy or sell the second price breaks the line..but..I did say the little box is all that matters..and that still stands..just wait and see :)
     
  111. Your $952 stop looked like a genius call this morning. :thumbsup:

    Oh well, live and learn.:(:banghead:

    You have a good day sir.:thumbsup:
     
  112. You really should start reading up on option strategies to lock in profits.. especially when you have them!

    Here is something to watch for..price establishes a range..breaks to the upside..quickly comes back into the range..you really do not want to be long once price is back within that range..placing a stop at the bottom of a range can be a very bad decision..as the same goes for the bottom of the range..as the top!

    Do you understand this?

    Also..CW..it appears..bought the rights to a software version for VSA..and his main aim was to get gullible people to hand over £5k for training and £1.8 k for VSA software..which worked well for a small while..as..bad news really does travel very quickly!

    Point is..of course volume matters..and of course looking at volume in relation to the OHLC of the bars can reveal who is in control..buyers or sellers..do you need software to work out and tell you who is in control..well..that depends..on how you want to trade..and how much you want to spend on analysis techniques..for the plebs..I would say forget it..waste of time and money..just start looking at the charts and trade what you see..not what you think!

    I could write a book about it all..maybe I will some day.. how about calling it..

    "One Born Every Minute" :)
     
  113. I tend to be more aggressive with my long positions less so with shorts.
     
  114. I don't place hard stops sir. I mostly had a target (or a series of targets, what you called a plan) and took action when the targets were reached....

    By the way, I am beginning to appreciate charts and what folks call price action. Started to make some headway. I made a couple of entries lately, one by the way was IBM.:)
     
  115. You just gave me another homework assignment: Looking at volume in relation to OHLC. There goes my weekend.:)

    Appreciate the coaching.

    Thanks again.
     
  116. MrScalper,

    Since you do not accept PM, I have to use a public post to thank you for your guidance. Your posts were road maps I used to modify my methodology, for the better.

    I especially want to mention chart reading. I used to think it was useless and just noise but after a few months studying them, using them in real trades, I am a convert. It is not important if the way I read is the same as yours or other "chartists" just that mine worked for me.

    I am sure it is obvious to others here but to a mom and pop small retail trader, it is an eye opener.

    Regards.
     
  117. You are welcome.

    Truth is.. anyone can make it work.. providing they have the ability to focus and accept that losses are an integral part of making money..this is by far the biggest hurdle to overcome..no need to go into the reasons why.. just accept it and get on with the learning curve.

    Discipline is not an easy thing to master..due to family issues..work issues.. social issues..etc..etc..but once mastered..then..it really does just become a matter of time.

    In relation to chart reading..be careful..there are many ways to interpret charts..but most are not of any real value..you must find the way that is consistent..each and every day..be it a minute..5..10..30..60..D..W..or M chart..unless you see it in all timeframes then you have not yet found that way that will really help you identify low risk trades..meaning.. good entries and exits.

    Options are a different ball game..but..chart reading skills can greatly help option strategies also..funny how most option traders haven't a clue about chart reading..if they did..they would really clean up :)

    Change is always present in the markets..but..the OHLC of a bar chart will never change..so that is what you should really concentrate on..let the "experts" talk about all the things that do not really matter!
     
  118. :thumbsup:
    Yes, I am on the right track.

    Thank you.
     
  119. upload_2017-10-5_10-28-21.png

    MrScalper,

    I am going to take profit on GOOGL, underlying @ $983.
     
  120. Mr. Scalper,

    You are providing very valuable information.
    I sincerely hope that those reading your posts will recognize the value of your words.

    Thanks, for your contributions.
     
  121. :thumbsup:. But it is not as simple as following a recipe or a formula. I had to work really hard to understand his concepts and philosophy.

    Frankly I don't know how good an investor/trader is he but it does not matter since I benefited greatly from his counsel.

    Regards,
     
  122.  
  123. Click the "More..." Above :sneaky:
     
  124. Let me ask you and MrScalper the following questions:

    1. For swing trades, I was able to look at charts and recognized certain patterns. Combining that with my existing method gave me better entries and better profitable exits the majority of the time. In general is chart pattern (S & R for example) trading a legitimate TA practice or was it just a lucky break for me? A yes or no answer suffices, no need to get into details.

    2. For intraday or short term trading (day trading) I was told I need to be able to trade off bar to bar chart information. So far I did poorly. Any comments on this will be greatly appreciated.

    Thanks.
     
  125. No. (as to your point one)
    Why?
    It is hard to understand what values you are placing on the pattern or patterns that you believe is valuable, and then combining that with your "existing method". Understand collinearity and the effects thereof on your decision to enter a trade based on all you are considering (probably too much) and the decisions will be confused and of no value.
    KISS may be the answer. Simple is Better. Keep It Simple Stupid


    [​IMG]

    2. For intraday or short term trading (day trading) I was told I need to be able to trade off bar to bar chart
    information. So far I did poorly. Any comments on this will be greatly appreciated.

    This is no doubt something that you adopted from Al Brooks book or course on trading "bar by bar". Again, possibly combining way too much information into your decisions. KISS. Just like taking vitamins or medications -- when mixing several different vitamins or medications taken simultaneously you will do harm even to your trade decisions.

    Conclusion: Let us show you what we do to simply trade profitably. It really is not that difficult. So, I am sure that Mr. Scalper or myself will be happy to assist. (Yes, some will share for free.) But posting in ET usually causes too much pain from those who just enjoy bashing. Generally, we all believe what we want to and it is difficult if not impossible to pry loose those beliefs -- even if those are conterproductive.

    BTW -- It is difficult, at least for me to answer a genuine question without expanding on the need for a one-word answer. Sorry for my inability.
     
  126. Information is of no real value until it is used in the correct way..in order for this to happen one must first understand what it is one is trying to achieve..as..it might not be possible to achieve the desired outcome depending on the circumstances!

    It really is funny how many jump into throwing away their money without first spending some time gathering the relative information.. instead they gather useless information that has no basis on facts or..even common sense at times :)

    Anyway..never worry about anyone else.. always look out for "number one"..and..never ever take financial advice from anyone who can not clearly explain the associated risks involved with the particular investment or speculative bet..way too many assholes out there..just make sure you never let your pants down..or you might wake up with one sore hole :)
     
  127. AGREE. Please understand that I am, like you, content. I am a giver, not a taker. Perhaps that is not being totally mindful of "number one". Thanks...
     
  128. To be honest..no way to tell without seeing your entries and exits..but as I know how you operate :)..I would say you are enjoying the bull run that seems to never be ending right now!!

    Unless you are prepared for the worst case scenarios..and know exactly what not and what you must do.. then.. you really are just pissing about..same as most do.

    It is a serious game..and requires serious attention..not will nilly trading and not understanding why you make and lose what you do.

    A professional trader or investor means exactly that..it is your profession..not a little part time job for making easy money.

    Academic bullshit doesn't help also..most academics are as thick as a plank when it comes to real life situations..they live in another world and can cost you a lot of money if you are the gullible type!

    Currently loading Win 7 Ultimate on to a laptop..then install Office 2013 Pro..then use a crack to stop that silly anoying activation crap..I don't think they need my few $ :)
     
  129. Sometimes I wonder if it is worth the effort to be of any help? Maybe first, we need to really determine the motives and effort that wannabes will put forth. Needed: Willingness to listen, Respect for the effort, and acceptance that it takes some work to learn enough to be successful.o_O
     
  130. Yes.. everything is in context!

    Last week a wild cat that frequents our home was not well..I got a call..came home..got the cat in a cage.. brought to vet..vet kept overnight..rang me next morning said cat was bit better but not eating..said would keep for day..rang me bout 2 hrs after said cat had deteriorated badly and was getting fits..I said to put him down and I would call up later and pay him.

    Cost me over $100 for a wild cat..but I did not care as I like animals..and try to help them any way I can..to be honest..I would not do the same for some people I know..in fact..there are some..who..if were drowning in the river..I would throw them a brick..but I would never ever harm a poor animal!

    Point is..yes..I do believe in what goes round comes round..but..I also do believe in "an eye for an eye"..only way.. those who con people out of money or whatever.. deserve exactly what they get..only way..no exceptions!!
     
  131. In relation to daytrading..if you think about what you are doing..as in trading for the "day"..or part of the day..then..does in not make perfect sense to be aware of the average moves that are made for a "day"!

    The more you get into financial trading..the more you will see that "averages" are widely used in all areas of pricing and decision making..but..as always..make sure you fully understand what it is you are trying to achieve..as..it might just not be possible to do so..so..why even bother trying!!
     
  132. In the current bubbly market, a monkey can make money throwing darts at the charts, so, my better outcome with "patterns" could just be an artifact of the bull market! There are still lots to learn.:(

    Like to ask you two more questions:

    1. How do I prepare for the worst case scenarios?

    2. Can one make money combining random trades (entry) and trade management? There was a discussion on this in another thread.

    It may not be obvious but I did learn a lot from you.:thumbsup:

    Best regards,
     
  133. Thank you. I think I understand what you and MACD are trying to tell me.
     
  134. We come here for different reasons. Only one thing is certain: Participation is optional. I for one appreciate your wisdom and counsel and I am committed to pay forward so the cycle closes.

    Best wishes.
     
  135. 1. Do not get greedy and take your profits regularly..after all..it just takes a click of the mouse to re-open a position..if you stay holding then you must accept the risk involved.. plain and simple..right now it seems a waste of time taking profits..but rest assured..it will not always be like this :)

    2. Random trades..or trading just for the sake of trading..is never a good plan..every trade should have 3 things set before you pull the trigger..entry price..exit price with loss..exit price with profit..your trade size will be determined by your risk level.. those who say timing is not important..well.. really show what they know..and that is very little..timing is everything when it comes to making money trading or investing..and.. the best way to get timing right is using bar charts with simple math equations that can all be done automatically with MS Excel..other than that..the rest is really "academic" :)
     
  136. 1. Yes, I will. Thank you for reminding me. 2000 and 2008 were very painful years.

    2. I just finished a back test of 1 year's worth of SPY, doing "random" entry, set a tight stop loss and "let profit ran". It was not rigorous nor definitive by any means but the result was not encouraging. So, random entries and then expect to be profitable with "risk management" is no easy feat.

    I will study your suggestion on bar charts and simple math equations. I used to base my trades using fundamental analysis and probabilistic computations. Thanks to your prior comments of using charts of the underlying, I now add chart patterns of the underlying to time my entry. I have done a dozen trades so far and the results are encouraging.

    Best regards,
     
  137. If you are still thanking me in 1 years time.. you will have learned something of real value!

    I like to think of it as one big game..with the losers playing against the winners..the losers have a lot in common..the winners know that what is put forward by most is pure and utter rubbish..and has absolutely nothing to do with making money!

    The losers are everywhere..just go to the home page of this site and look at all the rubbish posts about nothing..and they then wonder why they lose :)

    There is no substitute for experience..no matter what any idiot tries to tell you otherwise..be he selling something or just having a day dreaming session!

    The world is full of idiots who like to hear themselves speak..just make sure you understand that they are nearly all on the losers side..so be very careful to whom you listen to!

    "There is more value in the blink of an eye..than in months or rational analysis"

    I just wish I was 30 years younger..as you only really start to understand and learn as you get older.. unfortunately there is no easy way..just the way the silly mind works :)
     
  138. On this I call bollocks. I think EVERYONE wished they were 30 years younger to repair the damage or accommodate the mistakes they made...But you are assuming that 30 years ago you'd have the knowledge you have now, as a 30-year younger kid. This is the "coulda' woulda' shoulda'" problem. 30 years ago, I'd make the same mistakes and would probably be in the same state of affairs.

    I say, forget focusing on the 30 years ago. Let's focus on the 30 years into the future, and not make the same mistakes we made over the past 30 years.
     
  139. Why are you still making the same old mistakes over and over :)
     
  140. *BELCH*
     
  141. I will thank you again in a year.

    Sure but if you have patience, eventually rational analysis and fundamental valuation will prevail.

    No need to look back. Life is wonderful because few of us ended up where we thought we would be, but often better. Every new day is a bonus. :D
     
  142. It all depends on your available time.. capital..and experience. It is so easy to make money trading..which is exactly why so many find it so hard.

    The biggest problem is by far yourself..and no matter how hard one tries different things..they are all futile if you don't sort yourself out first!

    So much hype.. foolishness.. carelessness.. stupidity and just a lack of good old common sense..but then again..that is what ignorance does to people..the big problem of course is being able to differentiate between information of real value..and plain old bullshit :)
     
  143. For you it is easy. For me it is hard work!

    I agree I am the problem. For every trade I have to spend time analyzing, calculating, researching and now chart reading :(, before I can pull the trigger.

    Perhaps, but I have an open mind. The "bs" forced me to reexamine my method so nothing is wasted. Some posters said you spilled bs here but your posts are my Rosetta Stone!

    Best wishes.
     
  144. My words are bullshit to those who have no experience..very little money..use high leverage..and are lazy !

    My words make sense to those with a lot of experience.. adequate money..very little or no use of leverage..and are not lazy :)

    You can analyze all you want..back-test until the cows come home..read up on Fibs or DOM..it really does not make one little bit of difference..if.. you are not aware of what it takes to make money..and more importantly.. how to hold on to it!

    When I met CW some years ago..he told me a story about the Russians (not a racist post just saying exactly what happened)..and how for years those in power had no value on a persons life..the thought of getting rid of someone (it so transpires that Stalin murdered more of his own people than the millions of Jews that Hitler murdered) didn't bother them one little bit!

    "What has that got to do with trading" I asked?

    "Think about it" said CW!

    He was right..understanding what he meant has a lot to do with "becoming a successful trader" !!
     
  145. I know how to make money but not with chart reading and day trading, so let me ask you and MACD another relevant question:

    TA and FA are like A Tale Of Two Cities, can one lives in both?

    There are successful investors (and traders) using FA, e.g., Graham, Buffett, Burry.... Then there are successful traders using TA, e.g., Benedict, Dennis, Eckhardt, Thorp and many here, you MACD, Handle, comagnum, JackRab..... Do you have an opinion on combining both for trading? I know what you are going to say: Keep things simple, just using charts, why complicating things. So, I am looking for a pros and cons discussion.

    Thank you in advance.
     
  146. It depends on many things..such as.. your available time.. how much money you have..what you have learned..what you know to be reasonable..what you know is ridiculous..so..it really is up to the individual to work out what is best..the outcome shows if the individual is clever..or just another dumb ass trader :)
     
  147. Of course. If you are already a market wizard using TA, no need to add FA to the mix. If you are already a successful investor using FA, why add TA. For you elite traders, simplicity (and the chart) is king.

    For some of us in between perhaps adding FA to TA or TA to FA can help juice the outcome, unless the outcome was actually random and I was fooled by randomness.o_O
     
  148. Have you done any work on your plan yet..or are you going to wait until 2018 :)

    I recently came across a new investment opportunity for those who are too lazy to do some thinking for themselves..it went something like this..

    min investment = $150,000
    no up front fee
    management fee of 1.5% per annum
    9 different "strategies" to keep the risk low!!
    max drawdown 6% - not sure what they mean by this as they don't take your money out and give it back to you..so..they probably mean the max risk per year is 6%..after which they stop and re-evaluate the "strategies" before starting again!!!!
    no guarantee..you can lose some or all of your money..but of course they will not let that happen as they have engaged highly trained "professionals" to trade the strategies..LOFL :)

    I am sure they will have many takers..as most are just too damn lazy to do any work that involves some serious thinking..time commitment..and last but not least..risking SOME of your hard earned money to try and make a bit more!
     
  149. Yes, I do have a plan. I know the market will turn, the only question is when.

    In the mean time I have homework to do: Chart reading exercise.:banghead:

    best wishes.
     
  150. How can they predict the max drawdown/risk is 6%? And when they reach the 6%, if it goes down more, are they going to make the investors whole? If so, I am in.:thumbsup:
     
  151. Update on Kelly:

    When I started trading options back in 2013 and mechanically selling calls and puts, my win rate was in the 70-80% range. Recently win rate dropped to < 50% but Kelly improved. :)
     
  152. Do you have any idea why your win rate dropped as a result? Less profitable trades or more losing trades?
     
  153. Different trading strategies. If I sell OTM calls or puts, win rate could be in the 70-80% but the 20-30% losers significantly took away all the little profits I accumulated. If I sell DOTM calls or puts the win rate could be even higher but my occasional losers were huge. Other options strategies and management schemes lowered the win rate but the wins could be significantly more, better yet, losses could be smaller netting me positive expectancy.

    So for me win rate is an illusion, positive expectancy is what counts. Also, now I make sure my trade size is below my Kelly to avoid risk of ruin.

    Regards,
     
  154. @ironchef thank you for your explanation about your change in trading strategies. I misunderstood your previous message as it gave me the impression that applying a Kelly risk approach suddenly made your win rate drop.
     
  155. My layperson's understanding of Kelly is if you trade with Kelly and have infinite capital, you can maximize your return if your method has a positive expectancy. However, since most of us do not have infinite capital, trading with Kelly could lead to ruin so most prudent risk management advises to trade with fractional Kelly to reduce risk of ruin.

    Trading with Kelly won't affect win rate or expectancy probability.
     
  156. @ironchef I agree with you. It is more prudent to use fractional Kelly than full Kelly.
     
  157. more van tharp crap :)

    ok.. let's take a step back.. you know very little about real options trading..as..by your own car admission you do not use volatility analysis..or greeks analysis..so.. you are what is called a directional bias trader.. which is fine when everything is going the same way..but when the difficult decisions need to be made..look out :)

    i am saying it as it is..no nicey picey bullshit..you are having a lucky streak..which is fine..but unless you have a sound plan to deal with sudden changes that affect your profits..then you are not really trading..you are pissing about..and that is a dangerous game in the big bad world of financial trading!!!!
     
  158. Your criticism is very valid sir and I know you mean well, thank you. There is no shame in admitting I don't know much and I am just having a few lucky breaks. I don't trade options the way most professionals trade because I am not that smart and knowledgeable. So, how should I study volatility and the greeks? I don't know fancy mathematics, don't have fancy programming or coding skill and can only calculate simple Black Scholes using Excel.

    Some said trading is like playing blackjack and poker. To win you have to know when to place big bets and when to fold. When I determined the odds are in my favor, I place big bets and when the odds are not in my favor, I learned to stay out. So far it worked but I know the clock will strike 12 sometime in the future.:(

    I study charts everyday, participate in forums like ET, ask a lot of questions, to the point many thought it was annoying that I ask so many stupid questions. Many answers were not real answers, some real answers were in poems and riddles which I found difficult to comprehend. :( But I learned enough from you all that I think I can avoid a huge drawdown or "risk of ruin".

    I appreciate you taking the time to set me straight. It will not be wasted I assure you.

    Regards,
     
  159. it is very simple..be prepared..or accept the consequences..many years ago i was up a good bit of money..no losers for bout 6 months.. serious..then when the SHTF i was not prepared..needless to say i gave it all back..all i am saying is..fail to plan..plan will fail..simple
     
  160. I was going to ask you who was van tharp, then I decided I should not be lazy so went ahead and consulted Dr. Google. After reading up on him in Wiki, I can see why you were giving me a hard time.

    No, I did not attend his class or institute, I did not even remember he was mentioned in The Market Wizards.

    Why do you think his stuff is crap? Should I buy his book/course to find out?

    Regards,
     
  161. 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.
     
  162. 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 different..in fact i was one of the biggest fools out there..but as you get older..you 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 day..as 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 greedy..help those in need..and always be kind to animals..you do not have to be kind to humans who are not kind to you :)
     
  163. 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. :)
     
  164. 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 chart..is not an accurate statement..how can it be..as you have different players with different reasons and intentions

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

    as with any art..to see what the painter is portraying takes time.. appreciation..and dedication.. those high earning art valuers do not earn the big money overnight..it 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 :)
     
  165. MrScalper,

    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.
     
  166. no need to thank anyone Mr ironchef..as the only person who can really help you is yourself..but..if it makes you feel better..you are welcome :)
     
  167. 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.

    Regards,
     
  168. 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 !!!!!
     
  169. 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 https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2577782

    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.
     
  170. Thanks Ralph. Do you have that formula online somewhere as a calculator?
     
  171. No, I don't. Sorry. It would be a great idea though for some sort of intern, I'll look into it. It an also get pretty computationally intense & lengthy (its a genuine distributed processing problem as the number of components starts to increase).

    It gets even more intense when we look to solve for criteria other than just being "expected growth-optimal (all else be damned)." For example, most of us want growth withing some sort of constraint. One common measure might be, say, expected growth with respect to amount risked as far better criterion than just what many colloquially refer to as "Kelly," but I refer to (for the sake of accuracy) "Expected growth-optimal."

    Such a thing is solvable by the same equation, optimized for a different target, but it gets a little mind-bending for most: https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2364092
    and the slides to a talk one of my coauthors did on it (perhaps a little simpler):
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624329
    That's all theoretical though, and since I manage two hedge funds, like most traders, I have the day-to-day real world slog of bridging the theoretical with the real world. So much of my time in recent years has been spent on robust approximations which can be implemented i the markets themselves, realizing there is a big difference between the academic world and the trading world (and I come from the latter). So my efforts have been along the lines of:
    -How can you define the shape of this "manifold" without going into heavy math, doing it simply, with fair approximations?
    -How do you travel through this manifold, i.e. what quantity should i have on at present to satisfy my criteria in the markets with respect to current risks, capital available, etc. and do so in a manner tht doesn't require supercomputers solving very complex equations running parallel! I am i the day-to-day foxhole of the markets and I need robust tools that will work for me there.
     
  172. i often wonder what emphasis those in charge of large hedge funds place on identifying the best people to trade relevant markets..one is led to believe that those with high IQ and best head for maths land the best paying jobs..but..if these people were to trade their own money..would they take the same risks..just wondering!!

    one chap that can teach anyone an awaful lot about trading or investing is Harry Markopolos!!
     
  173. Thank you Mr. Vince for your thoughtful post. It will take me a while to digest your post and especially your paper on Growth Optimal Fraction. My layperson's understand of what you meant by growth optimal fraction is what we call the Kelly?

    I am math challenged and will never be able to understand let alone derive the optimal fraction. However, most of us traders instinctively determined that it is much "safer" for us to trade with a fraction much less than Kelly (e.g., 1/4 Kelly) in order to avoid the risk of ruin.

    The most provocative thought for me is this:

    As a purchaser and writer of options this is actually very helpful. Thank you.

    PS: I hope you can provide me with answers if I have questions after digesting your paper.

    Regards,
     
  174. I'll do what I can to answer things (I'm just learning myself, though that's been going on for decades on this obsession of mine).

    Yes.

    (And FWIW I am "Math challenged" too).

    Yes, very true -- most people's criteria in trading does not encompass seeking "expected growth-optimality, all else be damned." Most people have a risk concern/constraint, and this therefore implies trading some sort of quantity calculation more towards zero and away from the peak (what people refer to as "Kelly"). And every discussion about these diluted allocations are ad-hoc, capricious and absent any rigor because the dynamics of that region haven;t been examined, and I've tried to do that and my point is there are values in that diluted region that are more "optimal" to us, as traders, with our risk considerations, than just mere growth-optimality.
    .
    Interestingly, to the "right" of the peak, that is, the insane region between the peak and 1.0, is an area with significant geometric consequences to situations where one would seek growth diminishment. We don't often consider that since, as traders, we are concerned with growth. Yet there are many functions in human experience where the curtailment of growth is desirable (e.g. federal debt, pathology, etc.) which the material is germane to.
     
  175. You may find this interesting:

    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2259133

    Regards,
     
  176. I'm familiar with it. Interestingly, the academic community is painfully behind what the gambling and trading community has been doing in this arena (and in large part, because we have not played by their rules, and they have made little attempt to do anything but build on past endeavors in academia, to their detriment).

    This work was first performed (to the best of my knowledge) by a guy named Mike Pascual, in Vegas, who introduced it for multiple, simultaneous sports book gambling with an edge. It was circulated but unpublished. I have an original mimeograph of his hand-written book (and code) at a home I have in another state. I don;t know if Mike is still with us.
     
  177. %%
    Good point Mr Scalper; overtrading for me, also includes.......NOT have too big of a comission to profit ratio.
    Never bought in to strange idea trading/investing had to be boring; but that could mean the same as panic sellers/buyers never win.Planned sellers/buyers can win. Agree always be kind to animals, but i seldom put up with a biting or clawing animal:D:caution:
     
  178. sometimes i wonder how i was so silly in the past..i remember coming back from an occasion..we all headed to the local pub after for some drinks..after about 1 hour i left and went home..turned on my pc..and logged into woodie giving a chat about his magical method for short term trading the ES..the famous woodie's cci..all i will say is that i now laugh at how silly it all was..i wasted about an hour and went back to the pub :)
     
  179. It is time for me to summarize what I get out of this thread. Anyone disagree or have other ideas are welcome to comment:

    1. It is beyond my ability to derive the equations of or comprehend Kelly or Growth Optimal Fraction but intuitively, I came to the realization that trading at fraction Kelly will lower my risk of ruin.

    2. If there is no positive expectancy, risk of ruin is a certainty, Kelly or Growth Optimal Fraction be damned. So, I should definitely determine if my method has any positive expectancy before even trying to determine Kelly or Growth Optimal Fraction.

    3. Kelly, or Growth Optimal Fraction do not deal with risk of ruin, only optimal growth? For one without infinite funds, and non asymptotic trades, one better trades with a fraction of Kelly or Optimal Fraction or else risk of ruin can easily wipe out one's account.

    4. For low win rate methods, like long DOTM options, assuming positive expectancy, to get positive returns, one should execute a large number of trades to capture the occasional "lottery type" winning potentials. So, trade often and trade small.

    5. For high win rate methods, like shorting DOTM options, again assuming positive expectancy, perhaps one should limit the number of trades and try to avoid the occasional "black swans". So, trade a few times with huge leverage then retires, riding into the sunset! :cool: Trade often and trade small is the wrong way to go, counter the coaching of websites like tastytrade?
     
  180. It's not that complicated, really. It comes down to this: to figure out your optimal position size, find the leverage that maximizes the sum of log-returns of your past trades. Then trade with a fraction (such as 0.25) of that leverage.

    Yes, it gets more involved when you have to deal with portfolio allocation where you may need to trade (and hold positions in) multiple instruments at the same time, and to allocate for the specific time horizons. This is where it gets computationally intense.
     
  181. %%
    Younger one is== the easier it is to be silly. Sold a homebuilder on the ask today, but it started getting so wild, a market order may have done much better?? LOL Missed a 4 or 5 point buck [deer] 5/+ times @ about 50 yards; easy to miss @ any age :caution::caution::caution::caution::caution::DLOL
     
  182. "reality is what your brain tells you it is"!

    if you think that you need to know all about position sizing..optimal leverage..black scholes..kelly criterion..fibonacci retracements..stochastics..and so on..and on..and on..and on..and on..then..you might want to think about how it is your brain is telling you that you need all this information in order to carry out the simple acts of buying and selling :)
     
  183. we are all but fools caught up in the big game where the smart ones gamble with other people's money..the good old Mr & Mrs Gullible

    the real question to ask oneself..is..do i stay a fool..or do i make a concious decision to do something about it..which..of course..will mean some pain and suffering in my perceived reality

    it is always far easier to do nothing..and stay on the merry-go-round :)
     
  184. Not true, it does NOT lower your risk of ruin.
    Here is an easy way to calculate a "best guess" estimate of your "Kelly," and that is to use f equals approximately p/2, where p is what you expect the probability of a winning trade (or period) is in the future.
    If you are trading N different instruments, calculate f for each instrument and divide by N.
    The reason for these approximations is too lengthy for me to go into in this thread.

    This too is false. What you call "expectancy" is the probability-weighted mean outcome. But your actual "expectation" is a function of how many trades or periods you will play for, and the derivation of what the actual "expectation" is I will not go into here (for the same reason of it being too lengthy).
    In short, consider a 1 in 10 chance of winning $10, and a 9 in 10 chance of losing $1. Clearly, to make this situation where you would expect profitablity, you must play for a minimum number of periods (derivation of this also not provided here). Incidentally, though this has a positive expectation in the classical (probability-weighted mean) sense, the growth-optimal fraction to wager is 0 until you have played for a sufficient number of trials. The Kelly answer would be
    ((B + 1)*P – 1)/B

    =((10+1)*.1-1)/10
    =(11*.1-1)/10
    = (1.1-1)/10
    =.1/10
    =.01

    Consider the reverse, where you win $1 90% of the time, and the other 10% of the time you lose $10. Your Kelly formula answer is 0 (because your classical expectancy is negative) yet, the correct, growth-optimal fraction to bet is to bet 100% if you are going to make one play and quit. This gets lower for each "quitting point" up to a certain point (<10 plays, the derivation of the exact number not presented here) and bet nothing thereafter.

    Correct

    This is correct but the relative terms "large" and "small" may not be true -- it depends on the parameters of the outcomes (the same with the relative terms of trading a few times, and a large number of times) though, in broad strokes, it is correct.
     
  185. I believe you'd be way off the mark in many cases with that over-simplified approach to Kelly. Consider a trading system which gives you a 90% probability of making a 1% gain, and a 10% probability of making an 8.8% loss.

    For this system, full Kelly is 0.227, and half Kelly is 0.1135.

    According to your formula, you'd use:
    f = p / 2 = 0.9 / 2 = 0.45

    That is, you'd bet almost twice of full Kelly, which is almost certain to lead to the ruin.

    My own formula would give me f = 0. That is, I would not trade this system at all.
     
  186. Of course, you can get in trouble with it! The purpose, however, is you ONLY have an estimate of what hte futures percentage of winners is, this is your best guess for sound mathematical reasons.
     
  187. In a binomially-distributed outcome, such as you describe (two possible outcomes) as the ratio of what you can win to what you can loss gets ever greater, the value for f that maximizes expected geometric growth, asymptotically (i.e. as the number of trades or periods gets ever greater) approaches p, the probability (in the future, over the time you play this game).

    Similarly, as the ratio of what you can win to what you an lose gets lower, approaching zero, the value for f approaches zero.

    Thus, f is bound between 0 and p as a function of the ratio of what you can win to what you can lose.

    Absent knowledge of this ratio, and given that the farther away the f you use is from what the value for f will be the greater the price you will pay is (to the power of N, the number of periods or trades), you minimize the most this difference can be by being at f = p /2.

    Now if you know what this ratio is going to be, you can be exact, as in your example.

    I would argue that in trading we can be much more certain with system over a sufficiently long period to know what the percentage of wins will be (this is generally quite consistent over "sufficiently long" periods) far more so than what we stand to win vs what we stand to lose which are far more mercurial amounts into the future.
     
  188. This is not quite right. The upper bound for f is not 1, but infinity. Here is a simple illustration. Let's say we have a trading system with a 90% probability of a gain of 1%, and a 10% probability of a loss of 1%.

    The full Kelly is 80. That is, you should borrow 79 times of what you have, and bet that amount on every trade. Now, you may want to be conservative with, say, 1/4 Kelly. That would still prescribe the leverage of 20:1.

    With your formula, you would bet only 0.9 of your account, which would be way too sub-optimal.
     
  189. Kelly is what is not bound on the right at 1. The actual growth optimal fraction, the Optimal f calculation, IS bound on the right at 1.
    (The formula I present in this thread is for an asymptotic best guess when you don't know how the wins and loss amounts will come in. In truth, the Optimal f, the expected growth optimal fraction, is a function of how long you will be in the game).
     
  190. Thank you for your comments.

    I have to think about what you said carefully to understand the implications.

    Regards,
     
  191. Interesting!o_O
     
  192. For those of us who lack self confidence.:(
     
  193. Okay, that's something entirely different from the Kelly criterion then.
     
  194. That is an understatement of the year :)
     
  195. This is why I say to not use the Kelly Criterion in trading, even if one wants to be expected growth-optimal.
    The Kelly Criterion == Optimal f (the actual expected growth-optimal fraction whereas the Kelly Criterion Solution is a leverage factor on your account, as you seem to clearly see) only when the amount you can lose is the cost of the investment (i.e. long trades, no stop). In Capital Markets, we have many more dynamics (shorts, spreads and straddles [fx being a straddle in effect], volatility [which is "extreme-attracted], fixed income that is par-reverting, save for default risk, and a totally different creature if short, and on and on and on. Even the game of Blackjack, btw, for most casino rules, you do not know your worst-case loss on the hand before the deal(!) and hence "Kelly" cannot be directly applied there, contrary to conventional lore).

    Since when you get away from this special case, you have Kelly > Optimal f, most people who calculate and implement Kelly then go implement it as though it was the same as Optimal f, are way beyond the peak and thus taking on extra risk for less potential gain. Use the formula for Optimal f - I don't care if people still want to call it "Kelly," I'm not out to put my name on anything - I've never named anything I have ever come up with by my name. I have just seen over-and-over where people really get messed-up when they are trying to be expected growth-optimal by using Kelly's formula.

    Since in Kelly's 1956 paper, the examples used were instances of this special case, they (Kelly, Shannon, Graham) thought they were looking at a fraction, called it a fraction in the paper, when in fact it was a leverage factor, not bound on the right at 1, hence not a fraction. (It is actually bound to the right at some value, I forget what it is a function of, but it;s a different value >1 for each instance). Except it wasn't a fraction, and thus they only postulated such a fraction existed!

    The first instance of a value for the (asymptotic) expected growth-optimal fraction, to my knowledge, arises with Thorp's "Kelly Formulas," closed-form equations for calculating binomially-distributed (ie. 2 possible outcome) propositions. My 1990 book from the work I was doing in the 1980s starting with Larry Williams Robbins Trading Championship victory in 1987 presents the (asymptotic) expected growth-optimal fraction for any umber of possible outcomes.

    Since then I have presented it for multiple-simultaneous propositions (i.e. a portfolio) for the asymptotic as well as non-asymptotic case, that is, the actual optimal fractions for real world, capital-market implementations. (The paper referrred to earlier in this thread I believe, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2577782). Yes, they end up being computationally intense, and hence my focus in recent years on heuristics to determine this, which, as has also been edified in recent posts on this thread, are far from perfect!

    This is not to say that the original formula presented in Kelly's 1956 paper isn't usable uniquely on it;s own. One of the interesting properties of the formula presented therein is that the curve about the peak is symmetrical, which is useful in may deeper applications of this material both in the markets and the natural world.

    Lastly, I'm not trying to throw cold water on the "Kelly crowd." As I said, people can refer to things however they want, I'm just trying to dispel misconceptions I have seen come about over-and-over in people's application of the material, and I've pretty much devoted most of my life to studying it. I know it quite in-depth but then I've had a long time to sneak up on it!
     
  196. And the over-arching issue, with anything in trading, "in the foxhole," is for simple things that work. There is an enormous disconnect between the academic endeavors around capital markets, and making money in them.

    I long ago realized that the quantity decision was something I could control, was even more important in the long run than being right or wrong on any given trade, and the more I dug into it and understood, the less-suited the truth of it appeared to be to the foxhole.

    So that was the real challenge, making it applicable, workable.
     
  197. Okay, and what would you use as an alternative then?

    Let's make it a case study. Here is a trading system S with the following trade return distribution:

    40% probability of a 1% gain
    20% probability of a 2% gain
    10% probability of a 3% gain
    10% probability of a 1% loss
    10% probability of a 2% loss
    10% probability of a 3% loss

    Let's assume that this distribution is over a large number of trades and over a long period of time, and that we believe that the future distribution will be the same (or nearly the same). Let's say that our goal is to maximize the risk-adjusted rate of growth.

    For this distribution,
    Kelly (i.e. the risk-neutral leverage) is 13.22
    Half-Kelly (i.e. the common ad-hoc risk-sensitive leverage) is 6.61
    My own risk-adjusted leverage (I call it a "prudent leverage") would be 1.7

    What leverage would you use?
     
  198. Then we aren't talking about being at the peak of the curve, at the expected growth-optimal point, but for "risk-adjusted rate of growth" we have two other, significant points on the curve.

    Both of these points (as with the peak of the curve itself) a function of the length of time (number of trades or holding periods) we will engage this proposition.

    And for either of these two points Im going to mention, this needs to be sufficiently long do as to allow these points to resolve (i.e. 1 period or trade is not enough to maximize for the risk-adjusted rate of growth in other than an ad-hoc way, like 1/2 Kelly. or something like that which lacks geometrical significance on the curve of growth with respect to risk (f) over a specified, finite number of plays or periods.

    The first point would be the inflection point < peak of the curve. starting at f=0, and as f increases, the curve increases and is concave up - gain is increasing at a faster rather than the risk we are proposing. At some point (again, less than the peak) it goes to concave down. his point of marginal increase in gain increasing with respect to risk, flipping over, this inflection point, is one such point.

    If the inflection point exists, then there is a point also where the slope of the line tangent to the curve (the slope of which represents the ratio of gain to risk(f)) is greatest. This second point is > than the inflection point and < the peak.

    Both are significant points to maximize the risk-adjusted rate of growth, which is generally far more important to traders than the peak itself (what others often refer to as Kelly) which represents maximizing expected growth without any concern for drawdown or risk.

    The actual determination of these two points can be found here:
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2364092
    and notes on a talk given of the subject, here:
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2624329

    That's the derivation, and it's quite involved. Taking that "into the foxhole," as mentioned, a different exercise. You'll forgive me if I don't do the calculation here and give you my results (I long ago stopped doing that for various reasons) but a simpler, heuristic way to achieve it can be found in the book I wrote 5 or 6 years ago, the risk-opportunity book. I'm not trying to hustle the book here, it doesn't sell a whole lot, and the proceeds from it don;t go to me, or to a "formal" charity. But it does contain how to approximate those two points mentioned above without the heavy computational burden that the papers mentioned in this post (which give you the exact answers, mathematically).
     
  199. Ok, I never do this anymore, but I am in this case for the sake of clarity. Using the parameters of hte six scenario "game" you provided in this thread a few posts earlier:

    [​IMG]

    Note that at a horizon of 15 periods or plays (the minimum number given teh parameters of your game, for an inflection point to appear) the inflection point is at about 1.5%. At twenty games, then quit, it is at 7.1%.....and on. Ultimately, as the number of plays or periods until you quit approaches infinity, the inflection point approaches the peak.
    But this is the more conservative of the two risk-adjusted return maximizing points. (Incidentally, at 1,000 plays, the inflection point has migrated to 35.25%. closing in on the peak at 39.67%)
     
  200. Okay, let's take the inflection point for the 50 year horizon, which is 0.196. This means that you'd size each trade at 19.6% of the account size, correct? For example, if your account size is $100K, and the stock XYZ is trading at $10/share, then your position size would be:

    size = 0.196 * (100,000 / 10) = 1960 shares

    Is that right?
     
  201. 10/.196 = 51.02
    So I would trade one share for every $51.02 in equity, so
    100,000 / 51.02 = 1960 shares, yes
     
  202. Okay, thanks. With accordance to my own risk-adjusted growth calculations, the position size should be about 8 times larger. I'll see what you have in your papers, and perhaps we could continue this discussion after that.
     
  203. Incidentally, the calculation for 1 market/system is pretty straigthforward, and i have it on a spreadsheet. For multpiple, it gets considerably more involved and you would have to go to the paper I posted with LoPrado & Zhu and myself.

    An easier paper to understand inflection poitns for 1 market/system is:
    https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2230874

    You can use the enclosed spreadsheet which implements this. You put your outcomes and probabilities in B13 and C13, copying on down, including the working rows E,F & G.
    Depending how many rows you are copying down, you will have to amend the formulas in Col B, specifically B4, B7 and B9.
    Then you;re ready to solve. Make sure you have the Solver addon in installed in Excel. The Data-Solver, and set the parameters of the Solver dialog as follows:
    [​IMG]
    To determine the inflection point and set it in B6. If you cant solve for it, it is because the Horiaon you specified in B2 is too low and you must increase it for an inflection point to begin to show.

    To determine the f value and growth function answers for the rest of Col B, set your solver parameters like this:
    [​IMG]

    Good luck with it and PLEASE remember, I'm trying to trade the markets too, I'm not a software company, I make no representations about anything, I don;t support anything and I don't do homework for others.
     
  204. For a small mom and pop retail trader, your discussions are way over my head.

    For me, once I know I have positive expectancy, my first priority is to avoid the risk of ruin, so I can live to fight another day. I would follow nonlinear5 and trade a small fraction of Kelly or growth optimal fraction or whatever. I survived 2000 and 2008 and now instinctively trade much smaller sizes.

    So, what is the equation for determine trade size needed to avoid risk of ruin?
     
  205. Risk of ruin is minimized by not trading! The smaller size you trade in, the less your chance of ruin.

    Your criteria is certainly not just to minimize risk of ruin, that's only part of it yes?
     
  206. Actually, they are NOT too complicated. I have tried to simplify things. I find people implementing things like Elliott Wave or all sort of esoteric technicals and such who are retail traders. It;s not that this stuff is too complicated or over anyone's head, rather, it is that it is dry. Vital, but dry.
     
  207. %%
    Stochastics look fine in some charts;
    but i seldom use them, because they can get commission intensive, but mainly= i may not be out @ end of day. I tend , because of trends, to get in @end of day. Not a prediction:cool: I dont think markets are like taking quarters[00.25/+ half dollars] out of a pool hall, even though i did that when younger.LOL. But a [half] 50 % off sale can get plenty of attention.LOL
     
  208. Okay, I read your paper, and now I understand why your inflection point of 0.196 is so low compared to my inflection point of 1.7 for the trade distribution that I posted earlier.

    The reason for this difference is that you assume that it's possible to lose the entire allocated amount in one trade, and you re-scale the risk to account for this possibility. This throws the entire curve very sharply to the left, yielding very low leverage.

    I personally don't think that this assumption is reasonable. To illustrate my point, consider an (almost) Holy Grail system, which gives you a 99% probability of a 10% gain, and a 1% probability of a 1% loss. Without calculating anything, it's quite clear that one should borrow money to trade this system on margin, i.e. use leverage. But your optimal f is bounded to 1 on the right, which basically does not allow any leverage at all. That looks to me like an artificial restriction which affects the calculated risk/reward profile for a large set of trade distributions, including the one that I referenced earlier (the six-outcome distribution).
     
  209. I want the maximum trade size that can avoid risk of ruin.
     
  210. That would be size 0, as Ralph correctly pointed out. You have to re-think your objective criteria.
     
  211. neve bet the farm :)

    most are too inexperienced to understand that making money and holding on to money are not the same..and if you start betting too much..namely by overtrading..the chances of losing back most of what you make...if not all..and even a bit more along with it..are very very high

    how do i know this to be a fact..you may ask..easy..because it happened me a good few times..which of course..is what "experience" is !!!!!

    it takes a good while for the "penny to drop"..but when it does you will never look at trading or investing the same way..ever again..and.. you will laugh at all the silly and ridiculous posts that you see others post..as..now having experienced the required experiences..you will know exactly what is required in order to hold on to the money you make

    this kelly crap.. along with van tharp position sizing crap is not what you really need..once you learn that different markets behave differently..namely due to different people trading them..you can then work out the best approach to enable you to extract money from each market..using the best approach..with the minimal of risk to your hard earned cash.. note i said cash..not money you don't actually have :)

    i could write a book about it..but..as no one would believe it..it would not sell..so why even bother thinking about it..if you want it to sell you only write about things that people want to hear and believe..it doesn't matter if it is true or not :)
     
  212. funny..i find the best time to get in is within the first 10 min..and get out astmtmt :)

    there are many approaches to get in and out of the market..but..for the same market..the best approach is always the way that has the least amount of risk..in the shortest amount of time..simple really..yet so hard for most to SEE :)
     
  213. Thanks, but maybe your answer is too simplistic?

    Avoid is too strong a word, what I am looking for is a minimum risk of ruin fraction instead of a growth optional fraction. In another word, a risk fraction vs return curve similar to MPT?

    As an example, lets work out a case involves coin toss: Lets say the odds are 50:50 for a head or a tail, if head, I win 1:1, if tail I lose 1:1/2. In such a scenario, I have positive expectancy. With infinite tosses infinite capitalization, Kelly bet size is 0.25 and my risk of ruin is zero. I don't know how to calculate Mr. Vince's Growth Optimal Fraction.

    In a real world scenario, I need to include the number of tosses and my capital size. In such a case, I want to calculate the probability of ruin and find the minimum fraction. Perhaps, you are right, the minimum fraction is zero, i.e., don't bet. So, how do I compute the probability of ruin vs bet fraction?

    I am not mathematically capable of doing the exact probability calculation with finite tosses and finite capital. Can you or Mr. Vince help? If not, am going to Monte Carlo this.
     
  214. Infinite capitalization is not a requirement for Kelly criterion. You are probably referring to the concept of the "infinitely divisible capital", which is something else.

    The Monte Carlo simulations would indeed give you a good idea about the trade-off between the risk and return.

    A simple answer to your question about the risk/return trade-off is, size your trades to 1/3 Kelly. With respect to minimizing the probability of under-performance, you may want to look at the Stutzer Index.
     
  215. %%
    I started to say something about risk of ruin + not taking much money into a pool hall, when young+ daytrading, especially since i seldom use 10 minute barchart/candlecharts..........; but since that specialist seemed to need some seller$ not to long ago , i see your point .:D:cool:LOL-LOL. Not a prediction or a gamble.
     
  216. This is very involved. Risk of ruin (which can be defined as loss to within 100% of your starting bankroll, or any % of your starting bankroll) is an asymptotic function. One you determine your acceptable drawdown on initial funds (i.e. where you would say you are "ruined") you can seek the maximum return within that constraint. It;s solvable, but again I would refer you to the risk-opportunity analysis book as it really is to involved to go into here.
     
  217. Bet 1/2, 1/4, 1/8, 1/16.. of the farm?

    Being there done that too.:mad:
    I actually understand this now.

    It is amusing. Many commented that you hadn't said anything of substance but what you said helped me strung together all my thoughts to create my own trading method.
    I disagree. I don't think Kelly is crap, it gives me an anchor to formulate my trading strategy and risk management plan.

    Anyway, appreciate your reply and comments.
     
  218. Anyone trading equities and holding overnight has to account for gap risk - something Kelly does not factor in. One of the most successful traders spanning the last 4 decades said that he would have done much better had he traded with smaller size. He said that he would not have been tossed of as many winners and would have more staying power in riding the big trends. I think there is a real lesson in that. Other traders on par with the best have said the same.
     
  219. The element of time, the greater the amount of it, makes your mystery trade suspense thriller exponentially ambiguous and vague and difficult.
    Time is your enemy as a trader, but more of your friend as an investor.

    People, I think, should just hone and anticipate today...and rinse and repeat for the next day. The loose general idea is to maybe compound that. Higher revolutions the better.
     
  220. the best way is to only ever bet what you can afford to lose..and divide it into parts depending on chosen market and chosen strategy..for eg..daytrading limit set at max loss of $500 over 5 trades..which gives you a max loss of $100 per trade..which equates to 1000 @ 0.10..500 @ 0.20.. 200 @ 0.50..100 @ 1.00

    of course..if you don't know how..and what..to daytrade..then..no matter what way you structure your risk..the chances of you losing are very very high..so.. controlling your risk is of no real use unless you know what to do..and more importantly..can actually do it when the opportunity arises

    longer term trading is far easier..but again..unless you know how..and what..losing becomes far greater chance..even if you increase the account substantiality but fail to take the necessary steps to prevent giving it all back when the time comes

    to sum up..talk is cheap.. theories are fine for academics..buzz words are great for salesmen..if anyone decides to start risking their hard earned money in the financial markets..without a clear understanding of what is really involved in order to gain the required experiences..then.. let's just say they will more than likely get the biggest shock of their life..and..this shock has driven a lot of people over the edge..some so far as to leave this mortal world !!!!!!!
     
  221. i learned something of value tonight watching a tv programme about the brain..namely..an experiment with a group of people..they were all shown clips of animals in various stressful situations..some asked to just let their emotions run as normal..the rest were asked to suppress their emotions using willpower

    afterwards..all were given a hand spring and asked to hold closed for as long as possible..result..all those who were asked to suppress their emotions using willpower..let go the spring before those who let their emotions run as normal

    conclusion..exerting willpower uses up energy..or..it drains you..so..imagine what all those silly TA indicators and other ridiculous things do to your brain..and..we all know the end result for most :)

    very interesting programme..must download the series to watch and make some good use of this stupid internet crap :)