Kelly for traders

Discussion in 'Risk Management' started by kut2k2, Aug 22, 2007.

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  1. kut2k2

    kut2k2

    You're welcome :)
     
    #11     Aug 23, 2007
  2. kut2k2

    kut2k2

    OK but as I tried (unsuccessfully :( ) to point out in Example 2, simplifying even a 3-outcome situation to a 2-outcome situation can lead to miscalculations. This is a prime reason why so many traders have tried and failed to successfully use Kelly in their trade management: trying to force-fit a multi-outcome situation into a 2-outcome formula.

    This is also a great example of why William Eckhardt is railing against summary statistics, e.g., average win and average loss. It's like trying to describe the Taj Majal from a single exterior snapshot.
     
    #12     Aug 23, 2007
  3. Lucrum

    Lucrum

    Out of curiosity what does he suggest tracking?
     
    #13     Aug 23, 2007
  4. kut2k2

    kut2k2

    "... we use only the most robust and assumption free statistical tests, We have an aversion to summary statistics that obliterate important structural elements. For assessing systems, we use a technique called bootstrapping so that the complete distribution of past outcomes can make itself felt in decisions; the distribution is not simply viewed in terms of its mean and variance which can give a distorted picture."

    http://elitetrader.com/vb/showthread.php?s=&threadid=75851
     
    #14     Aug 23, 2007
  5. maxpi

    maxpi

    If the distributions of the average wins and losses is tight it should not be a big problem, even if they are maybe not so tight really. Many traders use fixed targets and exits, how far can the frigging averages deviate under those conditions?

    Humans tend to go wrong by assuming that the answer to a question has to be complex. They really will run away from a simple solution to a morass of complexity.
     
    #15     Aug 23, 2007
  6. kut2k2

    kut2k2

    I submit that calculating expected return over expected squared return is at least as simple as first calculating average win, then average loss, then win-rate before finally plugging them all into the 2-outcome formula.

    In a spreadsheet, you can do SUM(...)/SUMSQ(...) in a single step. :)
     
    #16     Aug 23, 2007
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    #17     Aug 26, 2007
  8. Quote from maxpi:

    If the distributions of the average wins and losses is tight it should not be a big problem, even if they are maybe not so tight really. Many traders use fixed targets and exits, how far can the frigging averages deviate under those conditions:


    Even with the best plans many traders are in for a shock when distributions don't work out as expected.

    I believe that packaging the trades into a time group, like one months trades, and considering that as a single unit is the best way of using Kelly. That way the averages are unlikely to deviate so far. Kelly sort of assumes a fixed win / loss ratio but in fact a win / loss ratio will vary over time and the best way to obtain a more fixed ratio (or lower the deviations of the averages) is to group the trades, considering a group of trades as a single unit.
     
    #18     Aug 26, 2007
  9. kut2k2

    kut2k2

    I explained that in the original post. Which part is unclear to you?
     
    #19     Aug 26, 2007
  10. joesan

    joesan



    what is f in the original post?

    Accroding to Ralph Vince ,f should be the percentage of the account to be risked in every trade, rather than the percentage of the account to be put into a trade .
     
    #20     Aug 27, 2007
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