KELLY CRITERION | Ed Thorp | Optimal Position Sizing For Stock Trading
HTML-код
- Опубликовано: 3 июн 2024
- KELLY CRITERION | Ed Thorp | Optimal Position Sizing For Stock Trading
The Kelly Criterion calculation was created by Ed Thorp and made specifically to beat the game of Black Jack. Later used by the likes of Jim Simons and even Warren Buffet to determine position sizing for the financial markets.
I personally use Fractional Kelly to optimise my trading strategy which adapts to my trading performance (or edge) over time.
For those interested I also include my stock trading spreadsheet and Kelly Criterion calculator to calculate position sizing.
Links:-
My Brokerage Account (Interactive Brokers) - bit.ly/3UGvn1U
25% Off Stockopedia - bit.ly/2YIcAIn
Risk/Reward trading spreadsheet - bit.ly/3ea6sl8
My Trading Spreadsheet/Calculator - bit.ly/3ea6sl8
Technical Screener - bit.ly/40S034v
Back test software - bit.ly/3oO1exN (20% Discount code)
My Breakout Scanner - bit.ly/40S034v
My Forum - bit.ly/40S034v
FREE Trading Tools/Software/Stuff - bit.ly/3ea6sl8
My Strategy Blueprint - bit.ly/40S034v
Edgewonk Trade Analysis Software - bit.ly/3xS6S7s Coupon Code = FWISDOM
Stock Trading videos:-
Timing The Market - • You CAN Time The Marke...
Best Chart Patterns - • The Best Chart Pattern...
Trend Following Study - • DOES TREND FOLLOWING W...
Trade Like A Casino - • How to Trade Stocks (U...
Dollar Cost Averaging - • Dollar Cost Averaging ...
Stop Loss vs Buy Hold - • Stop Loss Strategy VS ...
Trading Theory - • Best Trading Strategy ...
Dow Theory - • DOW THEORY - What is i...
Past Bear Markets - • PAST BEAR MARKETS & Ho...
Buy & Hope - • FINANCIAL EDUCATION GO...
Warren Buffet - • WARREN BUFFET Investin...
David Ryan US Champion - • BEST Stock Trading Str...
Trading Expectations - • REALISTIC STOCK TRADIN...
Super Trader - • Dr Van Tharp - SUPER T...
Oliver Kell US Champion - • BEST Trading Strategy ...
The Disciplined Trader - • Video
Kristjan Qullamaggie - • KRISTJAN QULLAMAGGIE -...
Avoiding Drawdown - • AVOIDING DRAWDOWN - In...
Breakout Screener - • CONSOLIDATION BREAKOUT...
MACD Explained - • MACD INDICATOR EXPLAIN...
Risk Reward Ratio - • RISK REWARD RATIO - Tr...
William O'Neil Disciples • Trade Like a WILLIAM O...
Dual Momentun • DUAL MOMENTUM | Moment...
Dan Zanger • DAN ZANGER | Breakout ...
Paul Tudor Jones • PAUL TUDOR JONES - Bil...
Spread Betting Naked Trader • NAKED TRADER'S Guide t...
Martin Schwartz Pit Bull • MARTIN SCHWARTZ | PIT ...
Kelly Criterion • KELLY CRITERION | Ed T...
Timothy Sykes • TIMOTHY SYKES - Tradin...
Think And Trade Like A Champion • MARK MINERVINI THINK A...
Van Tharp • VAN THARP Trade Your W...
Turtle Traders • TURTLE TRADERS STRATEG...
Ed Seykota • ED SEYKOTA Interview b...
Thomas Bulkowski Candlestick patterns • CANDLESTICK PATTERNS b...
Nicolas Darvas • NICOLAS DARVAS Box Tr...
Swing Trading • SWING TRADING STRATEGI...
Lone Stock Trader • LONE STOCK TRADER - Fr...
Mark Douglas • NICOLAS DARVAS Box Tr...
Jesse Stine • JESSE STINE INSIDER BU...
Stan Weinstein • STAN WEINSTEIN - SECRE...
Peter Brandt • DIARY OF A PROFESSIONA...
Mark Minervini • MARK MINERVINI- Trade ...
Alexander Elder • TRADING FOR A LIVING D...
Investing videos:-
Joel Greenblatt - • JOEL GREENBLATT - THE ...
Tony Robbins - • MONEY MASTER THE GAME ...
Robert Kiyosaki - • RICH DAD POOR DAD REVI...
The Naked Trader - • THE NAKED TRADER - Rob...
Common Stocks Uncommon Profits - • COMMON STOCKS AND UNCO...
A Random Walk Down Wall Street - • A RANDOM WALK DOWN WAL...
Vanguard Index Investments - • VANGUARD INVESTMENTS |...
As a professional trader I have consumed hundreds of financial books and endured countless hours of self education. My hope is that this channel will reduce the learning curve duration of many aspiring traders by providing the key information in a concise and enjoyable manner.
I also offer a paid subscription service for those looking to see all my investment decisions.bit.ly/40S034v
![I'm finally going to Smash Factor 11 [SP/ENG]](http://i.ytimg.com/vi/pXWw0ZW4rv8/mqdefault.jpg)
Finally someone who could explain this clearly. A rare quality indeed even for simple concepts.
Thanks mikko
Wow!!! Thank you for so many great resource suggestions. This list is fantastic. The Kelly explanation was great too. Thanks again.
Thank you
Very well explained!! Thank you very much!!
I have studied this kelly formula a while ago and i wanted a quick reminder and i found it! Amazing video, congrats and thank you! subscribed!
Awesome! Thank you!
I spent alllllllllll day trying to figure out this theory and then i came across your video and i got it!! thank you and fantastic video
You're very welcome!
This is the video I was looking for. Thanks
Welcome!
awesome vid and i needed to know optimum for my trading style,,,this is it,,,many thanks
Amazing content! Truly.
Much appreciated! Thanks 👍 👍
This is great! Thanks for sharing.
Glad you enjoyed it!
thank you for amazing content like this
Great explanation, thank you!
Thanks for watching
Awesome video Gary, thanks. JC
Thanks Jack👍
Thanks a lot, wonderful video.
Thanks Umut👍
This was great! Thank you.
Glad you enjoyed it!
Wonderful video. Thank you so much.
Thank you too!
Excellent review
there is something that kept me thinking. kellys formula calculate bet size, when you are playing blackjack bet size is exactly what you risk since you loose all the money that you bet. When applied to trading it has to be also the amount risked because if you use it as position size, with every stock with its different price, you will have different and aleatory returns. Meaning that, if you loose 45% of the times, thouse 45% of time could be a lot of money if the stock prices are very low.. but very little if the stock prices are high. Thats why I also dont understand why people use percentage of portfolio when entering a stock... every stock is different, different stop loss, diferent volatility. You always have to invest regarding amount risked.
Great form to explain!!!!
Glad it was helpful!
This is one of the important topic in trading but most of the people does not care. I hope this summary video will help people to understand. Thx FW!
Thanks Cagri👍
i read this 20yrs ago (ed thorpe). u are a scholar and a gentleman for sharing this.
Thanks A Russell, no problem at all.
Great presentation. Ed Seykota apparently said that he doesn't like to optimize leverage because the optimal point is too close to the "cliff". I can see exactly what he meant by your graph.
Thanks Peter👍
I just figure out my SL using Fib and S/R, then buy a lot size worth 2% of my account.
Hi Gareth - Can you also do a similar video on Fixed ration money management. I searched several websites but the problem is that, there is no optimal way to determine the Delta and lot sizing. Those are left subjective and mostly without a framework
Great video and u do have great trading matrix👍👏
Thanks Karthik 👍
4:20 calculation itself is correct, but the expected win of 404% and expected loss of 100% (everything in the position) which is implicitly assumed by the gambling version Kelly formula is rather unrealistic w.r.t. investment. And later, applying 10% stop loss is contradicting with losing 100%.
If the intention is losing 10% or winning 40.4%, with calculation with more generic Kelly formula, the result is 4.88, that means applying 4.88x leverage on the position.
I was wondering the same exact thing.. why is he using position sizing rather than expected risk. The 10% stop-loss is a realistic stop for most liquid securities, especially ETFs, Indexes, etc. so the downside is not going to be the entire position size. If he's worried about a major gap-down, he could always use a defined-risk options play instead of equities.
I would love to have the staking spreadsheet. My favorite book is Fortunes Formula.
Many thanks. It makes perfect sense to tailor the size of bet/investment to the perceived risk and I enjoyed watching Kelly's method. Seems wise to stake 33% rather than the full amount, especially in stock trading.
Thanks as always William.🙏
Great video! Thank you. New sub for you
Awesome, thank you!👍
Important concept in trading- Position sizing!......Still of all videos from you - William o neil strategy video is the best......It provides higher success rate.......Thanks for the video, brother.
Hi Bharath, Yes position sizing is vastly underrated. Thanks 👍
Could you link to the O’Neil one please?
I must know if you trade for a living... your videos are so informative and I can tell you're very passionate about it!
I do, but passively off the weekly charts.
The most difficult component of the formula is actual edge. Most people think they have an edge and do not. This is component is what makes billionaires and what makes average joes.
It just says as you lose money you reduce trading size preventing you from losing everything….logarithm
Great video!!
Thanks Saurabh👍
Would love the spreadsheet
World class content
Thank you
Howard Marks doesn't believe in Kelly's formula at all because the behavioural bias of the market and the fact that you will increase your position size when you're wining and reduce it when you're losing. I believe he has a point. Anyway, great video as usual. Appreciate your effort in making it👍🏻👍🏻👍🏻
Hi Doctor, it's a valid point, although I have back tested considerably on my 'true' results and found Kelly at 33% to be the optimum for my stats. Due to the trending nature of my strategy, if i'm losing and reducing stakes its suggests the trend has transitioned into a range and vice versa, it works for me, but every system is different therefore it may fail for others. Thanks for your feedback 👍
Financial Wisdom respect your views. Wish you all the luck in your trading journey👍🏻
@@theinvestmentdoctor8178 Thanks Doc, same to you...
what does Kelly have to do with behavioral bias? It’s a pure probabilistic play given you can accurately estimate the prob and odds
That’s why keeping risk to a percentage will help with that and also why you need to have discipline and stick to rules and not gamble
With keeping risk to a certain percentage, your position size will increase over time as your winnings grow but position size will also decrease over time if you take consistent losses
Great thank you!!
You're welcome!
Thanks!
No problem!
The Kelly formula assumes total loss. An adjusted formula can take into account partial expected losses. The binary fixed odds are indeed the main limitation as markets have a wide distribution of returns and future returns can differ from past returns.
The Kelly formula doesn't assume 100% loss
@@William.-. You either win the payoff or you lose the bet.
@@seatonluck5268 i thought there were numerous Kelly formulas
I do sports betting with kelly, and if I saw payout of 4.0 and fair odds of 2.0 you bet I'd be staking the full £5k on it ^^'. I got confused in the part about the calc returning the position size as I always saw it as the risk, but agree the variables are way more subjective in trading compared to sports betting. Would certainly add some pessimism into the input variables if I calculated for a trade.
Hi brilliant video, where is the spreadsheet you promised
On my website.
@@FinancialWisdom a name ?
Keep it up. 👍
Thanks gautam👍
Where did the analysis come from ? Great explanation
My experience more than anything
Hi, Excellent presentation as always. Thanks, Que: How do you find expected return? Is it past performance where you had some kind of trailing SL hit and profit booked?
Hi - Yes past performance provided the expected gain, if you have not got performance data yet, I suggest back testing etc.
Nice!!
Thanks!
Thanks sir for the great content.
You can use thumbnails like " How Paul Tudor Jones earn 100
Million dollars in one trade.
--Just a loyal subscriber
Great suggestion!
This is a useful video for understanding how Kelly Criterion is used by investors. But there are a lot of subjective inputs to the calculation. Actually every input is, except your equity balance (and even this is a choice). How useful is the math if so many inputs are judgments that could be way off?
Hi Daniel, your not wrong, so much of investing and trading is subjective or based on qualitative judgement. On the other hand much of it is objective and quantitative like stop loss, entry point, company fundamentals etc. I use Kelly myself to measure my 'recent' performance and translate it into a position size that suits it. It helps me keep it mechanical whilst eliminating emotion, but I hear what you say there are elements of subjectivity throughout, but it is inherent to the business and is what makes it a challenging endeavour..
@@FinancialWisdom Thanks. I can see using the Kelly Criterion as a heuristic tool, and certainly it would help keep you solvent. I have been working through the original Kelly paper and appreciate your clear and simple application.
Thanks Daniel, Yes I try my best to keep it as simple as I can, the subjects could go on and on but my views would be less and less 😉
I came here from a Nassim Taleb review of the book about the Kelly Criterion
great🙏
im very interested of your own strategy / followed portofolio after reading and summarizing all these books !
Thanks Musa👍
If there is chnage in Riskreward over the last few months, how far back do you consider in dterming the riskreward ratio for kellye claculation. For ex: If historial RRR is 4, and the most recent for last 5 months is 2.5, then which would you take the totoal aggregate or most recent months
There is no stop loss after the calculation or it would not be the case. The amount of losing should be considered in the calculation.
What software do you use to do the cartoons and animations ? Thanks for the sharing ..
Hi Video scribe
love your work bro
only one thing
be a little more detailed... because every person cannot read every book available because there are n number of them in the market
have a goal. to give a detailed review covering every aspect so that one who watches this video dont need to refer the book any further
u are doing a great work..... views will come .. dont worry about it
your work will always remain ever green ....
great respect for your work
Hi Parichit, I know what you mean, but its a balance between videos being too long and broad or summarising key aspects...🤔
Very interesting thank you.
You mention that the result of the equation is the size of the position, not the size of the risk.
Yet Kelly developed his criterion while assessing games where the full amount at play was at risk (ex: horse race bets).
So I do believe the correct way to apply the criterion to stocks (without considering the other caveats, some of which you mention), is to risk sizing, not position sizing.
Unless, of course, your whole position is at risk (such as could be the case with a penny stock, for instance, or with options).
I'd like to hear your thoughts on this.
Hi Nama Ste, Thanks for your feedback, I cant disagree with you...It depends on whether you believe you risk to be the position size or stop loss % (In my eyes). The principle in either case remains the adjustment of risk in accordance with the performance of your trading. It really is difficult to compare directly because of the fixed probability of the games the concept was originally developed towards. I fully accept what you are saying though👍
@@FinancialWisdom - You can't ignore the time-cost element inherent in financial bets. A 10% gain over ten years is a vastly different beast to a 10% gain in a week. The Kelly formula here makes no distinction.
@@FinancialWisdom how would you find expected return in options?
@@FinancialWisdom How do you know your actual stop loss % when stock can experience gap downs? Doesn't your approach suffer from high kurtosis? Where you calculate based on what you measure in common cases, but it's the uncommon cases that do the most damage?
@@StanislavMudrets From all my past 500+ trades, not too many stocks gap down passing a stop loss, if they have they are included in my stats
Interesting. I had never heard of the Kelly criterion before.
It's a great position management tool which also aids discipline 👍
@@FinancialWisdom Sound great. I am taking a class in portfolio management this fall. Maybe this or similar is included.
That is why accumulation and time trumps all
Very true
ICT 🙂✌🏻
Is expected return the same thing as profit factor?
What I don't understand is: what is the difference between position size and risk?
In the video example, would you buy stocks or contracts worth $3266 and exit the trade if there is a $326 loss?
I didn't understand.
My main question is, how do you decide how many is the probability of winning and losing?
Hi
The probability from odds you have calculated doesn’t add up to 52% it must be 65% for boxer b
The relationship between probability and odds is : if odds are a:b
Then prob =a/(a+b) ie 1.9/(1.9+1) which is a probability of 0.65 .can you explain how it is 0.52 ?
I have the same exact question
The odds numbers in the examples shown here are FOR 1, not TO 1, meaning you don’t get get back the original stake. That’s why the profit when you win is just .9 units, because 1 unit of the 1.9 you get back on a win is just the return of your wager. So 1.9 for 1 is equivalent to 0.9 to 1. So your equation becomes 1/(1+0.9)=52.6% for boxer B and 0.9/(1+0.9)=47.4% for boxer A. The “for 1” style of listing betting odds is common in sports betting in many countries, particularly in Europe, Australia, and Canada.
And one last question. Should I use the calculations considering open profits too? or just closed trades?
Its a matter of choice but I use closing trades, if you have wide stops perhaps open trades would be better...
Is there some guide as to how to use Kelly Criterion when your trading involves taking partial profits/pyramiding positions and removing the risk by moving the stop to break even?
Not sure, its not something I consider...
You would just use the totals from your back testing or real work results. For example you would apply your pyramiding and profit taking rules to a series of trades, such as 1000 trades. Take the results to calculate your win rate and your profit factor. Use that data in Kelly.
1:56 so if you get the 'through our own analysis' part wrong everything is fucked. but even if u get it right and aren't doing the Kelly Criterion you STILL might lose long term? is it safe to say simple as that?
ummm you could put it like that lol
so you basically have to create your own odds for anything you bet on? wonderful vid btw!
Would the calculation be different for a long term buy rather than a trade? Ie there’s no stop loss,? Thanks
Hi, I use it for the longer term (weekly charts) but the principle would be the same for any time frame. It should always be combined with a stop loss.😉
Hello,
This is an amazing video !! I tried to find a way to optimize my bet. And you gave me the solution
I have a question, how do you determine the probability of the boxer ?
Because you can not apply a value randomly just by thinking that the boxer have more experience than the other. Right ?
Thank you in advance
Kevin
Hi Kevin I used the boxer as an example, in a sporting event the odds are set by the bookmaker based on the data they have available, you on the other hand may disagree based on your expertise, this is what you call an edge.
I only use Kelly for stock selections because my edge is there, the probability for me is determined by my historical back testing and historical trading results. Hope that helps...
Probability is the historical data, all the trades you have in the past.
Question is how do u calculate expected return and winning probabilities?
You can only provide an estimate - Often based on past performance or back tested data
@@FinancialWisdom Thanks for the reply! Seems very hard to estimate for stocks, especially new growth companies and emerging industries in a changing interest rate and policy environment. I'm also thinking about applying Kelly Criterion to the crypto market, which actually has quite a bit of historical data points for reference.
can youu post the spreadsheet you are using , please!
Hi - It on my website shop.
at time 7.16 should the right 'aggressive' side be 'less return'?. I would have thought it should be ' more return (but not as much return per a unit of capital placed)'?
Hi Tom, Not really, because the more aggressive you are the more likely you are to take your account into a negative situation (based on the odds/strategy statistics followed)
This video explain why the aggressive side is more volatility and less returns. By explain what the Kelly criterion really is. ruclips.net/video/_FuuYSM7yOo/видео.html
This is something Ive mused about, using the chart patterns from Bulkowski's encyclopedia of chart patterns 3rd edition to calculate expected returns. But, if you have a 80% chance of making 8% in 2 weeks and a 20% chance of losing 3%; why not invest it all as you probably won't lose 100% but you probably will make 8%. I'm not using that system, just giving a reason why it's flawed for this purpose.
Thanks for your content, you never disappoint. I’d like clarity on somethings if you don’t mind. As a positive EV bettor, how many trades am I expected to take daily, also, using fractional kelly criterion, can I place multiple bets at almost same time? If yes, will I recalculate my position sizing (using kelly criterion) after each bet to place another bet immediately without waiting for the outcome of the first bet.
Example: Assuming I’m betting with $1,000, I used $50 for the first bet which hasn’t been settled. I have a balance of $950, will I recalculate my position sizing with $950 without waiting for the bet on $50 to settle. I really need clarity on this and how profitable it might be. Thanks a lot. I really hope you reply
How many trades you expect to trade depend on your trading strategy. You can place multiple of bets if you use fractional Kelly e.g 1 fully Kelly = 10% if you use 25% Kelly you can trade up to 4 times 2.50% of risk = 10%. You should always recalculate your position size with your stop loss (if you use a dynamic stop loss) after each trades to get the proper position sizing.
If the first bet isn't settled you shouldn't place the second bet.
@@icyboy771z 1 trade 1 bet?
@@William.-. if the Kelly says use 20% of your capital then you shouldn't place another bet until the first bet is settled. Doing so would mean you are placing more than what Kelly states and would. defeat its purpose. Although in your case, for e.g if 10 trades all have 20%kelly you can place 2% of capital each until 20% like you said and then no more.
In real life though you are better off with fractional than full Kelly.
@@icyboy771z Thank you for the good explanation.
From what I can tell, you are multiplying your edge by your odds, then dividing by the same odds.
Is this correct?
Doesn't the multiplication and division cancel itself out?
What am I missing?
You just subtract the difference and multiply by your total balance, right?
How to determine the probability of winning and losing in the stock market ?
Past performance helps
Is Kelly criterion same as "optimal F"?
I play with 0.4 Kelly for 25 years at the blackjack table. Can you pls explain how you determine Probability of Winning/Losing and the expected return in the stock market please? Thank you in advance.
Based on my strategies historical performance - You need considerable data before estimating probability
@@FinancialWisdom will you be so kind to consider doing a show to demonstrate that please?
Hi, it seems on a good market the position size on your stats is around 16%. To give an idea of how a bad market could be, could you pls let me know which position sizes you usually have during those periods? Thank you.
8 % - But of course in such a situation the opportunites/qualifiers become less therefore overall risk is far less - Ratchet up and ratchet down,,,,
@@FinancialWisdom Thank you. I need to make some adjustments to reduce volatility on bad markets
"My expected profit on risk for a winning trade" what does that mean? Our average win (if you add all losing trades and all winning trades) is 1.09%. But if you ignore the loses, our average win is 1.93%. Which one if any do we use?
Hi Carl - you need to average the profit on all the winners then average the loss on all the losers - This will give the average win to loss ratio. So if your average win (on winners) is 10% and your average loss (on losers) is 5%, you have a 2 to 1 win to loss ratio.
Hope that helps.
@@FinancialWisdom yes that's perfect thanks. Is there anything within the Kelly Criterion that takes opportunity loss into account? On any day we can make 3 or 4 trades at the same time yet our K% is 54.84% which will prevent us from doing so.
There are aprox 2000 trading entries we can make per month, trades happen at random times throughout the day and each trade lasts an average of 1 hour. Obviously there are not 2000 hours per month but 730.
@@carlevans1160 the Kelly criterion should go up or down based on the win rate, average %gain and loss
The 1.63% risk profile is based on the $ 20000. But you are using a fractional Kelly of $3266. To get 1.63 of risk would be $529.00. What am I missing ?
I got $326, $20k x 1.63%
what if my wiining propability is lower than 50%? But by RR is high so therefore the startegy still amkes money. But how to use kelly in this case?
It still works the same
How did you get the expected return number?
Hi Nie, The expected return is what 'you' believe you can achieve from your strategy, possibly from back testing or using a market average. If you think 20% is a reasonable achievement use that figure until you build a track record😉
How can we calculate the probability of winning and losing on trading?
From your historical trades or backtest
Hi, great video! but I didn't get your point of using kelly to calculate position size. If your stop-loss gets triggered and you only lose $326 which is 1.63% then your risk is that, only $326 not $3266. What's the point then to calculate the position size of $3266 using kelly, when you take a risk of $326 based on your stop-loss. what am I missing?
Hi Random TV - I'm not sure of you question in its entirety.. You need to establish position size to determine what the monetary risk the stop loss will be. Start with position size and the stop loss percentage will provide the stop loss risk.
@@FinancialWisdom Shouldn't I lose a fraction of kelly on every trade if my stop-loss gets hit? If so then the kelly amount should represent my stop-loss risk. Your kelly amount is representing position size, not the stop-loss risk.
How do you judge your expected return
Hi Lai, You would either need to back test the strategy or have available your own trading results, assuming of course that you had a disciplined approach that is repeatable going forward. With any kind of back test or proven methodology I would not suggest anyone taking this approach to staking. Hope that helps.
Never heard of zeros being referred to as "naughty"
😀 They can be very naughty!
what does it mean ?
Interesting. Minervini uses a similar principal, i.e. Mathematical modelling to improve results. Your win ratio and expected return are very good - you must be doing something right! Can i ask which methodology you follow?
Hi Inglese. Yes my stats are fairly good but i use a weekly time frame. I use a hybrid style which uses technicals and fundamentals, predominantly a breakout momentum style. Thanks for your feedback👍
Here's what i don't get about this - the expected edge in the formula is indeterministic. How do you estimate the probabilities? If you know them, then you should be able to make money easily anyway. Backtesting doesn't mean squat. The market isn't going to repeat. You could argue, using any small size that prevents large DD's (40%+) by being it beyond 3-4 sigmas should be enough.
Hi - it is not perfect, but I have a huge amount of historical data to at least give a guide on my expectation/probability. I would argue, if done correctly, back testing is quite meaningful.
But how do you know what the risk percentage is?
Or rather probability of winning?
Hi - The probability of winning is determined by either your back testing or historical analysis of your trading account. Risk percentage is therefore calculated after calculating all the required metrics inclusive of you win rate (probability of winning)
@@FinancialWisdom thanks for replying 👍
Any good Kelly Criterion apps?
Only my spreadsheet😀
4:21 So if the winning chance was 50% wouldn't the whole equation be 0 here? how do you subtract losing probably from winning probability?
Yeah in other words if you don't have an edge you have no reason to take the bet. Recommended bet size is zero.
you have to take into account "winning trade average / losing trade average" (payoff)
I don't understand this. If you have 10% SL, why to even calculate kelly criterion. I think this would super suboptimal money management solution for 50/50 and +2.0EV
$20,000 *33%=$6,600 and not $3,200, as mentioned in your calculation (a bit confused). Is this correct? Thanks
Hmm without watching the video again myself it maybe because i'm using fractional kelly i.e 16% and not 33% - Sorry if i confused you.
No it is 33.3% or 1/3th of the optimum and the optimum is $9.600 which results in $9.600/3 = $3.200
So what is the point of having a $100k trading account if you only ever use 1/2 at any given time? What about scaling into a trade that is winning with more capital? 🤔
Hi Michael, not sure what you mean, I go up to a 2.5 leverage factor
If I want to invest 4 stocks. is that mean each of them is divided by 4 = 33/4 ? anyone know？ thanks
1:20
7:00
I don’t see how going from 49% to less than 2% is in any way using Kelly criterion. It would make sense if you were using 1/3 of the 49% (~16%) but less than 2% seems like your just using the standard 1-2% rule with a lot of extra work.
By this logic i need to play bigger poker games at ignition.
My Brokerage Account (Interactive Brokers) - bit.ly/3UGvn1U
My Breakout Scanner - bit.ly/3ea6sl8
My Forum - www.financialwisdomTV.com/forum
My Strategy Blueprint - www.financialwisdomtv.com/plans-pricing
Edgewonk Trade Analysis Software - bit.ly/3xS6S7s
Stock Screener & Backtesting - bit.ly/3oO1exN (20% Off Code = FWSDM)
Stockopedia - bit.ly/2YIcAIn (25% Discount)
I'm having some issues to pay for the spreadsheet, for some reason is being refused with 2 different cards. Do you have any other payment options? BTC would be welcome, if possible. Thanks!
Sorry Rodrigo, just seen this.. are you having the same problem?
I think Larry Hite's 1% rule is good enough for me. This is too complicated
I know this is just an example, but how is your expected return $4.04 for every dollar invested??
Hi Iceman, It is based on my longer term win / loss ratio.
@@FinancialWisdom You should use expected dollar return, not win/loss ratio. You should also take the volatility of the stocks you are investing into account. Check out the paper The Kelly Criterion in Blackjack Sports Betting, and the Stock Market by Ed Thorp.
@@iceman273 Hi, the win loss ratio calculation returns back to the expected dollar figure. The filters i use include the NATR so the volatility measure throughout the selections are fairly stable.
I bet that's the payoff (average win/average loss). can't be the expectancy, or even the profit factor
@@ais6863 sounds like he used long term (cumulative) win for a dollar invested. That is wrong. Kelly criterion is applied on a single period basis
Hello. Do you know how often or after how many trades it's acceptable to change or position size? (Reviewing the new parameters)
Hi Humberto, Statistically I would say 30 trades, but personally I change after each closing trade, therefore if we have a losing patch (downtrending market) I would proportionally reduce the position size.👍
If we take a ton of research just to diversify away systematic range...we would be absolute minimum of 15 stocks in a portfolio while must funds would be at least 30...so in a range of say 3 - 7%. Many would argue for less concentration. At 50% 50% 1:1 we get 0 or no bet....if we just tick away one click at 51% 49% 1 : 1.1 we get to 6.5% in a HURRY. Just 1 more click to 52% 48% and 1 : 1.2 and we are already at 12%. So much for nobel prize winning researcher recommendations. Stranger results with any more moves away from these modest risk return profiles. What is the interpretation of 1.2 to 1...return a $1.20 or lose a full buck? Meeeeh! I like the idea. I like your review and presentation. But just a quick sensitivity analysis fails the SNIFF test. You use subjectivity to just back the suggestion down. I might like the directionality to push my intuition towards a bit more aggressive positioning. But we are both just adding a dallop of subjectivity on a model that does not feel well matched to portfolio risk management. Thanks for a great summary.
Hi Mac, thanks for the feedback, its clear you have a comprehensive understanding...
I use my variation to aid discipline and consistency, plus the adaptability to my performance.
Thanks again👍