Kelly Criterion & Risk Of Ruin As Risk Management Tool

[ironchef]

Mr ironchef..you stated that you have received "good advice" in relation to risk management that will help you improve your results. Do you not think you are jumping the gun?

To me there are no bad advices, I read and listened to everything and everyone, then tried everything, discard those that did not work and adapted those that worked for me.

Yes, I benefited because I had no risk management before and my trading/investment went through huge swings, both ups and downs. Risking 20% trading options instead of 100% seemed to fit ~1/2 Kelly so I am comfortable implementing that. Am I jumping the gun? No sir, I just lower my "risk of ruin" by a lot. Am I jumping the gun trading before knowing how to read charts? Probably, but I tried to compensate by lengthening my time horizon and using other structural factors.

Thank you for the coaching.

 

[ironchef]

I will predict here and now that you are wasting your time on such "stuff". The only thing you need to do is keep your risk per trade very low until you have gained adequate experience in relation to trading..if you do not include chart reading skills in this adequate experience..then you will just end up like the rest..talk about everything and really get nowhere.

I appreciate your comments because it showed you care.

How low should it be may I ask? As of today I am risking ~ 1% of my tradable assets on each option trade and I have ~10 open on average. I actually traded a lot more in the past but cut them back.

I really want to learn how to read charts effectively, so this is my priority going forward.

I promise you I am not going to be one that only talk and really get nowhere.

Regards,

 

[ironchef]

The web is full of "experts" on just about anything you can talk about..but of course most are using the web to live out their fantasy worlds!

I think you are too hard on us. There are many good people on ET, some may not be as good at trading as you but most are sincere, just like my college professors: Good at teaching but perhaps not as good at practice.

A good student should take all the knowledge he/she learned from good/bad teachers and forged his own path and I am not talking philosophy here.

Cheers.

 

[ironchef]

I bet you that you will not prove me wrong..do you accept the bet

I won't dare accept your bet sir.

 

[ironchef]

%%
I like Mr Druckenmiller[ mispelled his name Drunkenmiller LOL, correction]. But his famous quote['' It takes courage to be a pig,LOL'' ]can get BIG trends + blow Up accounts. But one reason i like him/Jack Schwager is he disclosed he blew up a[leveraged] fund of his...........................................................................

Actually Ironchief ;a lot/many funds, like long only mutual say fully invested // 95% + more invested; not many bow up =not leveraged/margined + maybe 100 or 500 stocks........................................................................................................

Beside$, I remember Mr Druckenmiller had real good work habits + worked real long hours for a long time. So if 5% do big trends well+ 95% blow up because of [ ''It takes courage to be a pig''LOL] Proceed with caution...........................................................................

And a lot of it[risk %] depends on the market; i did , for decades+ could risk a big % in home improvement business, wisely, because as long as i did not abuse the privilege; bid/ask was the same[ In the sense i could take lumber-paint back if a client canceled + get 100% of my money back] -they did not enforce a 10-15% restocking charge even they could. [the sign said they could charge a 10-15% restock charge]. Options are not very liquid; even though some can be...........................................................

Losses are a business expence,, less is more,;
but no such thing as busines$ without business expences

Thank you for your encouragements.

Very difficult to understand your post but if I read carefully, there are pearls of wisdom hidden in there for me to pick. Thanks.

The illiquid options are illiquid for a reason: Few players play there. Therefore not a lot of competitions except the market makers who are not betting one way or another. If my counter party is another trader, chances are he is a pro and trade against me because he is right and I am wrong.

 

[MrScalper]

I think you are too hard on us. There are many good people on ET, some may not be as good at trading as you but most are sincere, just like my college professors: Good at teaching but perhaps not as good at practice.

A good student should take all the knowledge he/she learned from good/bad teachers and forged his own path and I am not talking philosophy here.

Cheers.

Yes..but the key is being able to spot them right away..and be able to separate the wheat from the chaff!

If all of your current open positions were to lose..what would your drawdown on account be..if all of your positions do not have a limited loss in the event of a gap up or down..or lock limit market..then you must state so?

 

[Mtrader]

The web is full of "experts" on just about anything you can talk about..but of course most are using the web to live out their fantasy worlds!

Let me guess... you are not speaking about yourself. You are the REAL "expert".


But that's what everybody thinks of himself.

 

[ironchef]

MrScalper,

I found an interesting research paper on Kelly, in it was this quote by Paul Samuelson:

Let the gambler-investor face a choice between investing completely in safe cash or completely in a “security” that yields for each dollar invested, $2.70 with probability 1/2 or only $0.30 with probability 1/2. To maximize the geometric mean, one must stick only to cash, since [(2.7)(.3)] 1 2 = .9 < 1. But, Pascal will always put all his wealth into the risky gamble.

Not unlike the situation encounter by a day trader or option trader. So what is a trader to do? Well, according to Kelly criterion, here is the Kelly answer:

In Samuelson’s case a Kelly investor will put 42% of his/her capital in a security and yield [(1+ 1.7 ·0.42)(1−0.7 ·0.42)] 1 2 = 1.100, i.e. 10% growth rate in a typical market scenario. Moreover, a risk-averse person will likely bet even less than the Kelly fraction (one half of it is a common practice). Exhibit 1 shows two outcomes of “Kelly and half-Kelly vs. Pascal investment”

I used to trade like Pascal then intuitively reduced the size of my trade but Kelly will provide me a framework to find a criteria/size that is reasonable and that I am comfortable with.

Next assignment for me is chart reading.

Best wishes.

 

[nonlinear5]

I found an interesting research paper on Kelly, in it was this quote by Paul Samuelson <..> Well, according to Kelly criterion, here is the Kelly answer <...> I used to trade like Pascal then intuitively reduced the size of my trade but Kelly will provide me a framework to find a criteria/size that is reasonable and that I am comfortable with.

Paul Samuelson actually advocated against using the Kelly Criterion. That's what made the use of the Kelly Criterion controversial in the academic circles.

 

[ironchef]

If all of your current open positions were to lose..what would your drawdown on account be..if all of your positions do not have a limited loss in the event of a gap up or down..or lock limit market..then you must state so?

When I was in the Pascal mode, 100% of my tradable asset. Now, 10%. As for the other question, my longs are limited losses and my shorts are hedged or covered.