- Kelly Criterion For Trading Size Success In 2020.
- Kelly Criterion for Asset Allocation and Money Management
So you see now that after only two tosses you are already in the negative. And since Heads and Tails come in with roughly the same frequency, in the long run this pattern will continue and you will lose all your money!! Shocking!
Kelly Criterion For Trading Size Success In 2020.
The title and the chart speak for themselves. If you are in this zone – get out now!! The only other alternative is a margin call.
Kelly Criterion for Asset Allocation and Money Management
To get P you need to look at your history of trading in similar market conditions. I recommend checking the past 655 trades just to be certain.
From here we can witness the same pattern as we noticed before – to the left of one Kelly return increases as you increase risk. Then return drops off and becomes zero at 7K. After 7K you are bound to lose your investment in the long run.
The main reason why the Half-Kelly is so great is because it halves your risk but the long-term return only goes down by 75%. You can even see it from the chart. Other reasons include a reduction in balance volatility by more than 55% and a larger margin of safety in your risk estimate. More on that here.
Let’s see what happens to your account balance if you choose to bet a different % of your balance (I challenge you to check these numbers):
If you think of b as the odds of b-to-6, the payout of b when betting 6 unit of money, the numerator is simply the mean value of expected payout, or the so-called “edge”. Therefore, K% can be expressed as edge/odd. For obvious reason, you don’t want to bet in any game where the expected payout is 5 or negative.
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For any long-term return that you are going to get by betting in the red area, there is a matching return in the yellow and orange areas. So naturally, why would you EVER set your risks in the red area.
If you are trading below the Half-Kelly then you are being quite conservative. Which may be a good thing for risk-averse investors or if you are in control of a very large balance.
That’s what we are going to explore today – EXACTLY what % of your balance is it optimal to risk on a given trade. It’s going to be fun!