The Kelly criterion is a formula used to determine the optimal size of a series of bets in order to maximise the logarithm of wealth. In recent years, Kelly has become a part of mainstream investment theory and the claim has been made that well-known successful investors including Warren Buffett and Bill Gross use Kelly methods.
• Win probability - The probability that any given trade you make will return a positive amount.
• Win/loss ratio - The total positive trade amounts divided by the total negative trade amounts.
These two factors are then put into Kelly's equation:
Kelly % = W – [(1 – W) / R]
Where:
W = Winning probability
R = Win/loss ratio = value of profitable trade/ value of loss making trade
Example: say you are winning 60% of the time and your Win/ Loss ratio is 1.5. Then you should invest:
= 0.6-[0.4/1.5]=0.33 or 33% of your capital on a trade.
Another example: say you are winning 20% of the time and your Win/ Loss ratio is 5. Then you should invest:
= 0.2-[0.8/5]=0.04 or 4% of your capital on a trade.
Last example: say you are winning 50% of the time and your Win/ Loss ratio is 2. Then you should invest:
= 0.5-[0.5/2]=0.25 or 25% of your capital on a trade.
NOTE: I am risk averse and prefer capping investment per trade at 5% of capital.
Read more at https://www.investopedia.com/articles/trading/04/091504.asp
Kindly Note : All ideas and materials presented herein are for informational and educational purposes only, and is not intended for commercial or trading purposes. Neither does it mean to misguide anyone. Kindly make informed decisions on your own risk. Neither livettcelearn.blogspot.in website nor any of its owner shall be liable for any errors or delays in the content or for any actions taken in reliance thereon.
• Win probability - The probability that any given trade you make will return a positive amount.
• Win/loss ratio - The total positive trade amounts divided by the total negative trade amounts.
These two factors are then put into Kelly's equation:
Kelly % = W – [(1 – W) / R]
Where:
W = Winning probability
R = Win/loss ratio = value of profitable trade/ value of loss making trade
Example: say you are winning 60% of the time and your Win/ Loss ratio is 1.5. Then you should invest:
= 0.6-[0.4/1.5]=0.33 or 33% of your capital on a trade.
Another example: say you are winning 20% of the time and your Win/ Loss ratio is 5. Then you should invest:
= 0.2-[0.8/5]=0.04 or 4% of your capital on a trade.
Last example: say you are winning 50% of the time and your Win/ Loss ratio is 2. Then you should invest:
= 0.5-[0.5/2]=0.25 or 25% of your capital on a trade.
Read more at https://www.investopedia.com/articles/trading/04/091504.asp
Kindly Note : All ideas and materials presented herein are for informational and educational purposes only, and is not intended for commercial or trading purposes. Neither does it mean to misguide anyone. Kindly make informed decisions on your own risk. Neither livettcelearn.blogspot.in website nor any of its owner shall be liable for any errors or delays in the content or for any actions taken in reliance thereon.
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