KELLY CRITERION | Ed Thorp | Optimal Position Sizing For Stock Trading

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Күн бұрын

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.
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Пікірлер: 260

@jeffyeung6657 3 күн бұрын

I read from “the warren buffett way” that the simpler formula applying kelly’s fractional is bet%= 2 x win probability -1

@haodev Жыл бұрын

Finally someone who could explain this clearly. A rare quality indeed even for simple concepts.

@FinancialWisdom Жыл бұрын

Thanks mikko

@michellereid3978 Жыл бұрын

Wow!!! Thank you for so many great resource suggestions. This list is fantastic. The Kelly explanation was great too. Thanks again.

@FinancialWisdom Жыл бұрын

Thank you

@dcsrealtalk 2 жыл бұрын

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

@FinancialWisdom 2 жыл бұрын

You're very welcome!

@user-ok1ek6kx9g 2 ай бұрын

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!

@FinancialWisdom 2 ай бұрын

Awesome! Thank you!

@sorooshb007 Жыл бұрын

Very well explained!! Thank you very much!!

@hjmontene 3 жыл бұрын

This is the video I was looking for. Thanks

@FinancialWisdom 3 жыл бұрын

Welcome!

@arussell-bishop4438 3 жыл бұрын

i read this 20yrs ago (ed thorpe). u are a scholar and a gentleman for sharing this.

@FinancialWisdom 3 жыл бұрын

Thanks A Russell, no problem at all.

@wymandyer6261 11 ай бұрын

awesome vid and i needed to know optimum for my trading style,,,this is it,,,many thanks

@charlesc3618 3 жыл бұрын

This is great! Thanks for sharing.

@FinancialWisdom 3 жыл бұрын

Glad you enjoyed it!

@JackCorsellis 3 жыл бұрын

Awesome video Gary, thanks. JC

@FinancialWisdom 3 жыл бұрын

Thanks Jack👍

@TRADING_as_a_BUSINESS 2 жыл бұрын

Great explanation, thank you!

@FinancialWisdom 2 жыл бұрын

Thanks for watching

@STATxSomething 11 ай бұрын

thank you for amazing content like this

@suthan2003 2 жыл бұрын

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

@brandonWilliams-yr4re Жыл бұрын

This was great! Thank you.

@FinancialWisdom Жыл бұрын

Glad you enjoyed it!

@cagrikanik2403 2 жыл бұрын

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!

@FinancialWisdom 2 жыл бұрын

Thanks Cagri👍

@umutalper9822 3 жыл бұрын

Thanks a lot, wonderful video.

@FinancialWisdom 3 жыл бұрын

Thanks Umut👍

@BK_Ha 3 ай бұрын

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.

@BalazarsBrain Ай бұрын

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.

@naataa77 Ай бұрын

Amazing content! Truly.

@FinancialWisdom Ай бұрын

Much appreciated! Thanks 👍 👍

@santiagoeguren6837 3 жыл бұрын

Great form to explain!!!!

@FinancialWisdom 3 жыл бұрын

Glad it was helpful!

@natanluiza2936 3 ай бұрын

Excellent review

@solidthoughtpoker5207 3 жыл бұрын

Wonderful video. Thank you so much.

@FinancialWisdom 3 жыл бұрын

Thank you too!

@PeterTamura 3 жыл бұрын

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.

@FinancialWisdom 3 жыл бұрын

Thanks Peter👍

@Monix_7 3 жыл бұрын

Great video!!

@FinancialWisdom 3 жыл бұрын

Thanks Saurabh👍

@williamkz 3 жыл бұрын

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.

@FinancialWisdom 3 жыл бұрын

Thanks as always William.🙏

@bestinvestorcraig 2 жыл бұрын

I would love to have the staking spreadsheet. My favorite book is Fortunes Formula.

@karthikl1982 3 жыл бұрын

Great video and u do have great trading matrix👍👏

@FinancialWisdom 3 жыл бұрын

Thanks Karthik 👍

@TenTonNuke 2 жыл бұрын

I just figure out my SL using Fib and S/R, then buy a lot size worth 2% of my account.

@user-ok1ek6kx9g 2 ай бұрын

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.

@zozomo6307 9 ай бұрын

Would love the spreadsheet

@SinghGuruka 2 ай бұрын

World class content

@FinancialWisdom 2 ай бұрын

Thank you

@cadehaak Жыл бұрын

I must know if you trade for a living... your videos are so informative and I can tell you're very passionate about it!

@FinancialWisdom Жыл бұрын

I do, but passively off the weekly charts.

@marnick322 3 жыл бұрын

Thanks!

@FinancialWisdom 3 жыл бұрын

No problem!

@veag687 3 жыл бұрын

Great thank you!!

@FinancialWisdom 3 жыл бұрын

You're welcome!

@adamgdev 3 жыл бұрын

Great video! Thank you. New sub for you

@FinancialWisdom 3 жыл бұрын

Awesome, thank you!👍

@bharath8721 3 жыл бұрын

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.

@FinancialWisdom 3 жыл бұрын

Hi Bharath, Yes position sizing is vastly underrated. Thanks 👍

@Se99jmk 2 жыл бұрын

Could you link to the O’Neil one please?

@priyamd4759 Жыл бұрын

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?

@FinancialWisdom Жыл бұрын

Hi - Yes past performance provided the expected gain, if you have not got performance data yet, I suggest back testing etc.

@musaabsi 3 жыл бұрын

im very interested of your own strategy / followed portofolio after reading and summarizing all these books !

@FinancialWisdom 3 жыл бұрын

Thanks Musa👍

@adrianriosmares1727 Жыл бұрын

Where did the analysis come from ? Great explanation

@FinancialWisdom Жыл бұрын

My experience more than anything

@theinvestmentdoctor8178 3 жыл бұрын

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👍🏻👍🏻👍🏻

@FinancialWisdom 3 жыл бұрын

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 👍

@theinvestmentdoctor8178 3 жыл бұрын

Financial Wisdom respect your views. Wish you all the luck in your trading journey👍🏻

@FinancialWisdom 3 жыл бұрын

@@theinvestmentdoctor8178 Thanks Doc, same to you...

@jiehe6943 2 жыл бұрын

what does Kelly have to do with behavioral bias? It’s a pure probabilistic play given you can accurately estimate the prob and odds

@rileygshep7606 Жыл бұрын

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

@dovaz0x 2 жыл бұрын

Nice!!

@FinancialWisdom 2 жыл бұрын

Thanks!

@gautam1827 3 жыл бұрын

Keep it up. 👍

@FinancialWisdom 3 жыл бұрын

Thanks gautam👍

@victoriachua333 3 жыл бұрын

What software do you use to do the cartoons and animations ? Thanks for the sharing ..

@FinancialWisdom 3 жыл бұрын

Hi Video scribe

@jtolpa4634 5 ай бұрын

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.

@jerryware1970 Ай бұрын

It just says as you lose money you reduce trading size preventing you from losing everything….logarithm

@MillionaireJourneyHubz Жыл бұрын

Hi brilliant video, where is the spreadsheet you promised

@FinancialWisdom Жыл бұрын

On my website.

@MillionaireJourneyHubz Жыл бұрын

@@FinancialWisdom a name ?

@hjmontene 3 жыл бұрын

And one last question. Should I use the calculations considering open profits too? or just closed trades?

@FinancialWisdom 3 жыл бұрын

Its a matter of choice but I use closing trades, if you have wide stops perhaps open trades would be better...

@rocksmania 11 ай бұрын

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

@TradingToolsSoftware Жыл бұрын

Is expected return the same thing as profit factor?

@Jebbended Жыл бұрын

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.

@DarkBullCapital 7 ай бұрын

Is Kelly criterion same as "optimal F"?

@mattlm64 2 жыл бұрын

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.

@William.-. 2 жыл бұрын

The Kelly formula doesn't assume 100% loss

@mattlm64 2 жыл бұрын

@@William.-. You either win the payoff or you lose the bet.

@William.-. Жыл бұрын

@@seatonluck5268 i thought there were numerous Kelly formulas

@k-vinh7856 3 жыл бұрын

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

@FinancialWisdom 3 жыл бұрын

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...

@ZeroFloat. 3 жыл бұрын

Probability is the historical data, all the trades you have in the past.

@DANIELMABUSE 3 жыл бұрын

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?

@FinancialWisdom 3 жыл бұрын

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..

@DANIELMABUSE 3 жыл бұрын

@@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.

@FinancialWisdom 3 жыл бұрын

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 😉

@zahir2k 3 жыл бұрын

Would the calculation be different for a long term buy rather than a trade? Ie there’s no stop loss,? Thanks

@FinancialWisdom 3 жыл бұрын

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.😉

@MrSilviut 3 жыл бұрын

I came here from a Nassim Taleb review of the book about the Kelly Criterion

@FinancialWisdom 3 жыл бұрын

great🙏

@routhstars 2 жыл бұрын

How to determine the probability of winning and losing in the stock market ?

@FinancialWisdom 2 жыл бұрын

Past performance helps

@waleycase8450 7 ай бұрын

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.

@tianxia4092 3 жыл бұрын

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?

@FinancialWisdom 3 жыл бұрын

Not sure, its not something I consider...

@chadsilver352 5 ай бұрын

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.

@Brucelee-kv1ce Жыл бұрын

can youu post the spreadsheet you are using , please!

@FinancialWisdom Жыл бұрын

Hi - It on my website shop.

@ysvrm 2 жыл бұрын

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 ?

@sayanmukherjee8905 2 жыл бұрын

I have the same exact question

@DB-nq1fk Жыл бұрын

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.

@lakshay534 2 жыл бұрын

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

@FinancialWisdom 2 жыл бұрын

Great suggestion!

@namaste9111 3 жыл бұрын

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.

@FinancialWisdom 3 жыл бұрын

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👍

@peteneville698 3 жыл бұрын

@@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.

@saywhat4229 2 жыл бұрын

@@FinancialWisdom how would you find expected return in options?

@StanislavMudrets 2 жыл бұрын

@@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?

@FinancialWisdom 2 жыл бұрын

@@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

@laipeter4388 3 жыл бұрын

How do you judge your expected return

@FinancialWisdom 3 жыл бұрын

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.

@dairymark 10 ай бұрын

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.

@FlouZ_HomePage Ай бұрын

My main question is, how do you decide how many is the probability of winning and losing?

@jchien 2 жыл бұрын

Question is how do u calculate expected return and winning probabilities?

@FinancialWisdom 2 жыл бұрын

You can only provide an estimate - Often based on past performance or back tested data

@jchien 2 жыл бұрын

@@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.

@MoneywithPennies 3 жыл бұрын

Interesting. I had never heard of the Kelly criterion before.

@FinancialWisdom 3 жыл бұрын

It's a great position management tool which also aids discipline 👍

@MoneywithPennies 3 жыл бұрын

@@FinancialWisdom Sound great. I am taking a class in portfolio management this fall. Maybe this or similar is included.

@michaels-h5539 2 жыл бұрын

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.

@FinancialWisdom 2 жыл бұрын

8 % - But of course in such a situation the opportunites/qualifiers become less therefore overall risk is far less - Ratchet up and ratchet down,,,,

@michaels-h5539 2 жыл бұрын

@@FinancialWisdom Thank you. I need to make some adjustments to reduce volatility on bad markets

@inglese2996 3 жыл бұрын

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?

@FinancialWisdom 3 жыл бұрын

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👍

@niecha6332 3 жыл бұрын

How did you get the expected return number?

@FinancialWisdom 3 жыл бұрын

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😉

@iamshadab27m 3 жыл бұрын

ICT 🙂✌🏻

@tomleyshon8610 3 жыл бұрын

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)'?

@FinancialWisdom 3 жыл бұрын

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)

@Warriormon87 Жыл бұрын

This video explain why the aggressive side is more volatility and less returns. By explain what the Kelly criterion really is. kzfaq.info/get/bejne/laylqLyEsp3df6M.html

@chukwuemerieezeigweneme4030 2 жыл бұрын

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

@William.-. 2 жыл бұрын

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.

@icyboy771z 2 жыл бұрын

If the first bet isn't settled you shouldn't place the second bet.

@William.-. 2 жыл бұрын

@@icyboy771z 1 trade 1 bet?

@icyboy771z 2 жыл бұрын

@@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.

@William.-. 2 жыл бұрын

@@icyboy771z Thank you for the good explanation.

@parichitsharma3298 3 жыл бұрын

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

@FinancialWisdom 3 жыл бұрын

Hi Parichit, I know what you mean, but its a balance between videos being too long and broad or summarising key aspects...🤔

@carlevans1160 2 жыл бұрын

"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?

@FinancialWisdom 2 жыл бұрын

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.

@carlevans1160 2 жыл бұрын

@@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.

@William.-. Жыл бұрын

@@carlevans1160 the Kelly criterion should go up or down based on the win rate, average %gain and loss

@lostmarxbro 2 жыл бұрын

That is why accumulation and time trumps all

@FinancialWisdom 2 жыл бұрын

Very true

@DonRua Жыл бұрын

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.

@FinancialWisdom Жыл бұрын

Based on my strategies historical performance - You need considerable data before estimating probability

@DonRua Жыл бұрын

@@FinancialWisdom will you be so kind to consider doing a show to demonstrate that please?

@TrendRain Жыл бұрын

How can we calculate the probability of winning and losing on trading?

@FinancialWisdom Жыл бұрын

From your historical trades or backtest

@constantinelycouris2325 3 жыл бұрын

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?

@FinancialWisdom 3 жыл бұрын

ummm you could put it like that lol

@constantinelycouris2325 3 жыл бұрын

so you basically have to create your own odds for anything you bet on? wonderful vid btw!

@coreycantu3996 Жыл бұрын

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?

@Tonixxy 3 жыл бұрын

But how do you know what the risk percentage is? Or rather probability of winning?

@FinancialWisdom 3 жыл бұрын

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)

@Tonixxy 3 жыл бұрын

@@FinancialWisdom thanks for replying 👍

@bobcrane2720 2 жыл бұрын

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.

@tongtongwang 5 ай бұрын

If I want to invest 4 stocks. is that mean each of them is divided by 4 = 33/4 ? anyone know？ thanks

@vaclavsochacy Жыл бұрын

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?

@FinancialWisdom Жыл бұрын

It still works the same

@byronlovelace8379 3 жыл бұрын

Any good Kelly Criterion apps?

@FinancialWisdom 3 жыл бұрын

Only my spreadsheet😀

@randomtv8550 2 жыл бұрын

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?

@FinancialWisdom 2 жыл бұрын

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.

@randomtv8550 2 жыл бұрын

@@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.

@allakhani309 2 жыл бұрын

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 ?

@William.-. Жыл бұрын

I got $326, $20k x 1.63%

@vetiarvind 3 жыл бұрын

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.

@FinancialWisdom 3 жыл бұрын

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.

@larrieuxroyale 3 жыл бұрын

Never heard of zeros being referred to as "naughty"

@FinancialWisdom 3 жыл бұрын

😀 They can be very naughty!

@chris20100469 3 жыл бұрын

what does it mean ?

@Trancer006 2 жыл бұрын

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?

@sethen132 2 жыл бұрын

Yeah in other words if you don't have an edge you have no reason to take the bet. Recommended bet size is zero.

@ais6863 2 жыл бұрын

you have to take into account "winning trade average / losing trade average" (payoff)

@indie-om9hm 5 ай бұрын

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

@zetsui0411 3 жыл бұрын

1:20 7:00

@marianaandersson7252 Жыл бұрын

$20,000 *33%=$6,600 and not $3,200, as mentioned in your calculation (a bit confused). Is this correct? Thanks

@FinancialWisdom Жыл бұрын

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.

@vsanden 4 ай бұрын

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

@j.michaelfinehomesllc85 Жыл бұрын

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? 🤔

@FinancialWisdom Жыл бұрын

Hi Michael, not sure what you mean, I go up to a 2.5 leverage factor

@hjmontene 3 жыл бұрын

Hello. Do you know how often or after how many trades it's acceptable to change or position size? (Reviewing the new parameters)

@FinancialWisdom 3 жыл бұрын

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.👍

@sayanmukherjee8905 2 жыл бұрын

Are the odd calculations accurate here?

@FinancialWisdom 2 жыл бұрын

Should be...

@iceman273 3 жыл бұрын

I know this is just an example, but how is your expected return $4.04 for every dollar invested??

@FinancialWisdom 3 жыл бұрын

Hi Iceman, It is based on my longer term win / loss ratio.

@iceman273 3 жыл бұрын

@@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.

@FinancialWisdom 3 жыл бұрын

@@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.

@ais6863 2 жыл бұрын

I bet that's the payoff (average win/average loss). can't be the expectancy, or even the profit factor

@iceman273 2 жыл бұрын

@@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

@BretWickstrom 7 ай бұрын

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.

@iancruzfernandes5889 3 жыл бұрын

Can you also share the average number of trades you take in a year.. thanks for the video : )

@FinancialWisdom 3 жыл бұрын

Hi Ian, varies depending on the environment, approximately 80 is likely, but i use a weekly time frame so hold longer. 👍

@iancruzfernandes5889 3 жыл бұрын

@@FinancialWisdom Wow.. those are great numbers.. congrats!!.. also whats your average hold time for both winners and losers.. and is there a good ratio to aim for, that you are aware of.

@FinancialWisdom 3 жыл бұрын

@@iancruzfernandes5889 HI Ian, approx 60 days for losing trades and 150 for winning trades.

@iancruzfernandes5889 3 жыл бұрын

@@FinancialWisdom Thanks for the update

@macboracay184 3 жыл бұрын

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.

@FinancialWisdom 3 жыл бұрын

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👍