Hi Globalarbtrader, Thank you for your reply, even though there was no need to lecture me on Kelly optimal, I studied that stuff (plus Ralph Vince and Ryan Jones optimal bet techniques) decades ago. Here is a simple question : I go to a Las Vegas casino with $2000 and a couple of hours later I exit the casino with $4000 in my pocket. Would you say I had an excellent gambling day (I just doubled my money)?
%% I never risk on a daytrade what I can for longer swing position; I can not even get in a position in one day or dont anyway. NO daytrader should risk as large a % in giveback of profits;simply because even a good trending ETf seldom if ever makes a 7 hour profit like a 7 day profit. Could get in trouble risking more on a $5k account ; but its usually replacable/LOL
That's why I say the lack of diversification. It's just too much to handle when they need to get in and out of trades quickly.
I didn't mean to lecture you, and I apologise if it came across that way. As to your Las Vegas trip, this is actually a very interesting question that doesn't have a simple answer. The short answer is no, but please read on. So let's first assume you have gone to Vegas with an objective and an expectation that you will make a profit. You're probably an excellent card counter perhaps working in a team, or maybe you've built on the work of Farmer and friends and can predict roulette with some accuracy. That isn't neccessarily true, since most people who enter casinos do so with a negative expectation of winning, and are there only for entertainment (perhaps they don't admit that to themselves, but it's true). Their objective is to try and win some money, score a few comps, and flirt with the cocktail waitresses. Having assumed you are there for the serious business of making money and only that, what you want to do is adjust your betting strategy to achieve the best possible expected outcome. What you actually won or lost is to an extent irrelevant, except that it will give you a few data points that will help you calibrate how accurate your expectation of risk and return have been. If you lose too much, then you should rethink your strategy or your bet size, but equally true if you win too much then your bet size should be reduced. Then it comes down to how you would value various possible outcomes that you could have had that day. Classical finance (Markowitz and all those dudes) assume that you'd want to maximise your expected arithmetic mean return, subject to some risk constraint, where risk is definied purely by the standard deviation of returns. Kelly betting assumes you'd want to maximise your log portfolio wealth, which is the same as maximising your geometric return on each bet, which is the same as maximising the expected median amount of money you'd expect to have when you left the casino. It's extremely unlikely that a 100% profit in two hours would be possible unless (a) you have an extremely high edge (much higher than what is possible even if you can card count perfectly), which means you are likely to get thrown out of the casino and never be allowed back in again, or (b) you have taken risks well beyond what would be deemed optimal under eithier a Markowitz or Kelly strategy, or indeed any sensible way of weighing up various outcomes. So the answer so far is no. However there are two exceptional circumstances under which the 100% profit doesn't require overbetting. Firstly, you might have a belief system under which you value all final wealth above $3,999 very highly, and treat all gains or losses below that figure as equally bad. Sounds weird to me, but the example given in a book I once read is if you have to pay some mobster $4,000 in two hours or you and your entire family will be killed, then that is a perfectly reasonable utility function. That probably doesn't apply to many people.Although I read about people all the time saying 'I must $500 a day trading, once I've made $500 I will stop'; it has absolutely no rational basis and I find it really dumb. I doubt it is genuinely their personal utility function, and it's probably regurgitated advice from some shady trading guru. Since I doubt very much you have that kind of way of valuing gains and losses, and I am pretty sure there is no mobster after you or you wouldn't be wasting time on ET, I think we can dismiss this theory. The second explanation depends on how we interpret the statement 'I go to a Las Vegas casino with $2000'. Some people seem to say - including on this thread - 'well I'm risking a large fraction of my trading account, but my 'real' trading capital is much larger than that'. Putting aside those who have multiple accounts (and really ought to be adding them up when doing their maths), this is an approach I have a big problem with. 99 times out of a 100 it will lead to traders feeding their accounts like slot machines, topping them up after each loss resulting from using too much leverage. Most of this 'notional trading capital' they will end up using isn't money they have even yet earned when they start trading. OK, maybe you start trading with $2,000 and then add $500 of savings each month, but in your first trade you should be sizing the positions as if you had $2,000; not the $20,000 you expect to have added to the account over the next few years. So, back to the casino, the original $2000 might only be a tiny fraction of your 'risk capital allocated for gambling' in which case the 100% gain isn't really a 100% gain, and might only be a gain of a few percent of their total bankroll. Incidentally, although it probably makes sense to only take a proportion of your bankroll into the casino, you should be taking in at least enough to cover say a 1 in 10 drawdown event betting at the optimal size, or your expected returns would be significantly reduced. But since you didn't say 'I go to a Las Vegas Casino with $2,000; one percent of my gambling fund of $200,000' again I'm going to dismiss this explanation. In summary, to answer the question, "Would you say I had an excellent gambling day?", for me personally the answer is no, since you must have taken insanely high risks, far larger than Kelly optimal, to double your capital in a couple of hours. The most likely outcome of your gambling session was that you would lose most or all of your capital; it just so happened that today was one of the small fraction of days when you got lucky enough to double your money. I would say you had been a very bad gambler: very stupid, albeit very lucky. That isn't excellent gambling, though it is excellent luck (and fortuitious, given how bad you are at gambling). It would have been better if you had lost money; then you might have realised how crazy your betting strategy was and done something about it. As it is, people who walk out of casinos with 100% gains in two hours will ascribe too much of that success to skill and carry on gambling in very large size. GAT PS Feel free to replace 'casinos' with 'Robin hood options trading platform'.