it has sound on my side. Don't know why but other people reported sound problem with youtube videos as well. Google to find solutionsPeterLe wrote: ..
G- Ive seen that video before (but the link doesnt seem to have sound?)
Regards
Peter
Ed Thorp, Jack Schwager, and the Kelly criterion
I’ve been backtesting a strategy using £100 stakes and got the following results:Euler wrote: ↑Thu May 02, 2013 11:26 amThe Kelly criterion indicates that the fraction that should be wagered to maximize compounded return over the long run equals:
F = PW – (PL/W)
where
F = Kelly criterion fraction of capital to bet
W = Dollars won per dollar wagered (i.e., win size divided by loss size)
PW = Probability of winning
PL = Probability of losing
When win size and loss size are equal, the formula reduces to:
F = PW – PL
For example, if a trader loses $1,000 on losing trades and gains $1,000 on winning trades, and 60 percent of all trades are winning trades, the Kelly criterion indicates an optimal trade size equal to 20 percent (0.60 − 0.40 = 0.20).
As another example, if a trader wins $2,000 on winning trades and loses $1,000 on losing trades, and the probability of winning and losing are both equal to 50 percent, the Kelly criterion indicates an optimal trade size equal to 25 percent of capital: 0.50 − (0.50/2) = 0.25.
Average win = £8.37
Average loss = £6.92
Win probability = 0.59
I’m trying to work out the best staking plan, but when I put the data into the kelly formula above I get
F = 0.59 - ((1 - 0.59) / (8.37 / 6.92))
= 0.25
This is a smaller proportion of my bank than I would have expected, and also I don’t understand why the result is not affected by the size of the wins and losses, but only the ratio between them. If the average win and loss was £83.70 and £69.20 the answer would still be 0.25, which seems counter intuitive.
Am I using the formula incorrectly or is it just the wrong formula for what I’m trying to do?
Thanks for any advice.
If you had ten times your bank, traded £1000 instead of £100, you could have average profit and loss of £83.70/£69.20, but 0.25 would still be the correct proportion of your bank because you have ten times as much.
But I don't think the staking plan is fully applicable to exchange trading because you have to take into account the price, volatility, liquidity and consider stakes that the market can accommodate without risk of not being able to get out.
But I don't think the staking plan is fully applicable to exchange trading because you have to take into account the price, volatility, liquidity and consider stakes that the market can accommodate without risk of not being able to get out.
Thanks Derek
When I was asking about different win and loss sizes I was assuming the stake size stayed the same. So if you had two strategies both using £100 stakes and the first had an average win and loss of £8.37 and £6.92 while the second had £83.70 and £69.20 I would have expected the second strategy to need a lower stake percentage as I thought that the greater the potential losses were the more cautious you would have to be.
If there’s no formula that’s more suitable for exchange trading then I may just alter the code I wrote for the backtesting so I can experiment with different stake percentages to see what would have worked best.
When I was asking about different win and loss sizes I was assuming the stake size stayed the same. So if you had two strategies both using £100 stakes and the first had an average win and loss of £8.37 and £6.92 while the second had £83.70 and £69.20 I would have expected the second strategy to need a lower stake percentage as I thought that the greater the potential losses were the more cautious you would have to be.
If there’s no formula that’s more suitable for exchange trading then I may just alter the code I wrote for the backtesting so I can experiment with different stake percentages to see what would have worked best.