Kelly Criterion & Risk Of Ruin As Risk Management Tool

[MrScalper]

I do want to bring this thread back to Kelly as I think lots of you folks are using Kelly and seemed to believe in it and it seemed to do the job for you. Thank you for the coaching.

Personally I benefited from understanding Kelly and I am now able to quantify the risk level I should undertake and so far using it based on my trading outcome seemed consistent.

To MrScalper, I appreciate your comments but I believe Kelly do have a place in a small retail trader's (me) bag of tricks.

Risk management is counter intuitive for someone trying to maximize returns. But my frustration in the past with risk management was most I read here on ET were qualitative, hand waving and no one could explain how to manage risk other than general statements like don't risk more than 1% of your asset on each trade, trade small and trade often (tastytrade), risk management is THE ONLY EDGE....

The reason it did not make sense to me was no one could tie it to returns, win rates, R:R... If my trading success is 50:50 and R:R 2 - 1 my risk level is definitely different than someone at 70:30 and R:R 10 - 1. It just does not seem right that both use 1% risk capital?

Special thanks to nonlinear, comagnum, globalarbtrader, HobbyTrading for your insights. My guess is you are all professional traders. nonlinear, from your name you must be an option trader and you understand convexity.

MrScalper, thanks for bringing up an alternative view point.

Further comments, suggestions are welcome.

As I said..do not go on what I say or anyone else for that matter..go with what works best for you.

Risk management is a requirement..not an edge in my understanding!

An edge is something like being in the right place at the right time..and being willing and able to act as required..plain and simple!

Effective chart reading takes a long long time..and even when it is pointed out to you it still takes a long time for it to eventually sink in..why..well..again it is down to the individual..but most who try their hand at this game..including yours truly..do not have the required experiences when starting out..how can we!!

I will leave you get on with Kelly and his like..if nothing else they will allow you to stay in the game..hopefully long enough to see it for what it really is

 

[ironchef]

Effective chart reading takes a long long time..and even when it is pointed out to you it still takes a long time for it to eventually sink in..why..well..again it is down to the individual..but most who try their hand at this game..including yours truly..do not have the required experiences when starting out..how can we!!

if it is real, and I hope it is, then I will get it eventually. I am actually beginning to see something in longer duration charts, or, maybe just my imagination or mirages.

Anyway, I will try a few swing trades using those and see if they are real.

Thanks again.

 

[ironchef]

The OI for that strike is 15 contracts..so you are not holding any more than that

Closer to expiry means faster time decay..yes!

Break even point is around $66..yes?

Current price is $69.29..yes!

What is your plan for today..or do you plan to do nothing and hold till expiry?

Final report card:

Just to let you know that GILD is now a long term holding for me. I am not a pro just a small mom and pop retail trader, so we are talking small potato.

In the mean time, I keep staring at the charts, everyday, in real time. Still no light bulb turning on in my head as I am still unable to predict the next price move from the charts with any level of certainty, just noise.

Thank you for taking the time to answer my thread.

 

[MrScalper]

Final report card:

Just to let you know that GILD is now a long term holding for me. I am not a pro just a small mom and pop retail trader, so we are talking small potato.

In the mean time, I keep staring at the charts, everyday, in real time. Still no light bulb turning on in my head as I am still unable to predict the next price move from the charts with any level of certainty, just noise.

Thank you for taking the time to answer my thread.

No problem, I was just pointing out my opinions in relation to what can work best for some people. This in no way means that others can not make money using different approaches. The only thing that matters is the bottom line..if positive then fine..if negative..then clearly changes are required.

There is no one answer that suits all, but there are definitely some ways that are much easier and less riskier than others..it is up to each individual to find out how much they want to..but one thing is for sure..same as as line of work..no pain..no gain. This easy money thing is just an advertising gimmick to get gullible people to part with their money..nothing worthwhile is ever easy!

 

[ironchef]

No problem, I was just pointing out my opinions in relation to what can work best for some people. This in no way means that others can not make money using different approaches. The only thing that matters is the bottom line..if positive then fine..if negative..then clearly changes are required.

There is no one answer that suits all, but there are definitely some ways that are much easier and less riskier than others..it is up to each individual to find out how much they want to..but one thing is for sure..same as as line of work..no pain..no gain. This easy money thing is just an advertising gimmick to get gullible people to part with their money..nothing worthwhile is ever easy!

I just want to make another comment on chart reading, again let me use GILD as an example since this is a real trade:

The analogy of studying charts is like studying a foreign language. What I need is to find my Rosetta stone. Watching the GILD price/volume unfolded in real time after the initial breakout, I developed a sense of the collective market's view. There was an exit point where I could make a nice profit if I intend this to be a short term trade but based on my analysis of where things are with GILD I am keeping it for now and shorted some options instead.

Another question for you sir: What is your view of GOOGL at the current price level for swing trade options based on chart patterns? I went long Friday but not from chart patterns.

Thank you for your patience in staying with me.

Regards,

 

[MrScalper]

I just want to make another comment on chart reading, again let me use GILD as an example since this is a real trade:

The analogy of studying charts is like studying a foreign language. What I need is to find my Rosetta stone. Watching the GILD price/volume unfolded in real time after the initial breakout, I developed a sense of the collective market's view. There was an exit point where I could make a nice profit if I intend this to be a short term trade but based on my analysis of where things are with GILD I am keeping it for now and shorted some options instead.

Another question for you sir: What is your view of GOOGL at the current price level for swing trade options based on chart patterns? I went long Friday but not from chart patterns.

Thank you for your patience in staying with me.

Regards,

Volume can be misleading at the best of times..it can be worth watching for very short term trading with T&S..and more importantly..if the last trade has gone off at the bid or ask price..and where the bid/offer is now at..you have to set it up and watch it to see how it can be of value for timing entries and exits!

GOOGL..wouldn't touch it with a barge pole..why take on more risk than you have to

 

[ironchef]

Volume can be misleading at the best of times..it can be worth watching for very short term trading with T&S..and more importantly..if the last trade has gone off at the bid or ask price..and where the bid/offer is now at..you have to set it up and watch it to see how it can be of value for timing entries and exits!

GOOGL..wouldn't touch it with a barge pole..why take on more risk than you have to

View attachment 176942

Appreciate your opinion. You are right again.

Regards,

 

[MrScalper]

Appreciate your opinion. You are right again.

Regards,

It really does not matter if I am right or wrong..but yes..my opinion might be useful for some..and useless for others!

One thing to ponder..C.R.R

Cue.. Routine..Reward

It pays to read good material..as there is a lot more to making money than just buying and selling..I know I said all you need is a simple Bar Chart..but that is just a part of the big picture.. that comes under the Cue part..your next part is very important..and most who try never get it right..which leads to a negative reward..thus forming the bad "you know what"!

 

[ironchef]

It really does not matter if I am right or wrong..but yes..my opinion might be useful for some..and useless for others!

One thing to ponder..C.R.R

Cue.. Routine..Reward

It pays to read good material..as there is a lot more to making money than just buying and selling..I know I said all you need is a simple Bar Chart..but that is just a part of the big picture.. that comes under the Cue part..your next part is very important..and most who try never get it right..which leads to a negative reward..thus forming the bad "you know what"!

My long GOOGL options are quite profitable as of this morning. I am setting a mental stop if the underlying goes below $920 but will let the position develop because I think I see a pattern on the daily chart (or maybe just my imagination/wishful thinking), if that is what you meant regarding chart reading.

 

[Max1]

No. The Kelly Criterion assumes the existence of a utility function, but then proceeds to maximize the growth of the bankroll. If we modify this to correct the inconsistency, then we find that the Kelly system does not "outperform" other systems. It is just one of many possible systems.