Critique this position sizing method

globalarbtrader said:
One downside is you will do a lot more position size related trading

So if you lose 12.5K you'd cut your position in half; then double your positions when you make it back.

IMHO it's better to trade an eighth (half times a quarter) optimal F on the full amount you're willing to lose. If your trading capital is 100K that ought to be what you're prepared to lose.

This gives you the same effective risk as using half optimal F on 25K, but if you lost 12.5K you'd only reduce your positions by 12.5%, so less trading.

GAT
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Is this really a big deal? For the system to lose that much it will be a pretty rare event. extra trading costs weigthed the probability seems to be a minor factor
 
Daal said:
Is this really a big deal? For the system to lose that much it will be a pretty rare event. extra trading costs weigthed the probability seems to be a minor factor
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Depends on what your half kelly is. Suppose you think that your SR is 1.0 implying annualised vol of 100% full kelly, 50% half kelly.

If you run at 50% vol on a quarter of your full capital, then on an average day you'd lose 50% / 16 ~ 3%. It's not infeasible you'd lose 10% in one day and have to cut positions 10%. Doesn't sound much but that can easily rack up serious trading costs.

If you run at 50% x 1/4 = 12.5% vol on your full capital then an average day would be less than 1%, and your regearing trades would almost be lost amongst your other trading.

GAT
 
trade for a few years to get good stats on your ratio then apply kelly for optimum growth. Always adjust the ratio as you gather more data thru your trading. a trader starting out using kelly is ridonkculous! and probably a lot of wishful thinking.
 
brainyforex.com/position-sizing-methods.
Hope this help.

I use the % Capital method (since I become aware of risk...) which I call %Risk:
For Forex accounts: Lots to trade = Equity * Risk% / (Stop Loss in Pips * Pip Value) / 100
I don't care about margin since I the risk that I take is between 1.5 and 3%.
I still use this formula for Forex, Equities and Futures. The risk that I take is related to a specific strategy (expectancy, peak of DD and duration of DD). I have 5 strategies. I take 5 different amount of risk.
 
Here is my current recommendation for a real-world trading fraction:

Trading fraction = min[ 0.9/max[ .0001 , 2*max[ -Ri ]_i=1toN ] , ½*NKF ] ,
where
NKF = the new Kelly formula (see below) ,
Ri = the return (fractional) of the i'th trade ,
N = the number of trades.

NKF = max[ 0, s1 ]*( s2*s2 - s1*s3 )/(s2*s2*s2 + s1*s1*s4 - 2*s1*s2*s3) ,
where
S1 = sum[ Ri ]_i=1toN ,
S2 = sum[ Ri*Ri ]_i=1toN ,
S3 = sum[ Ri*Ri*Ri ]_i=1toN ,
S4 = sum[ Ri*Ri*Ri*Ri ]_i=1toN.
 
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