Quote from danielc1:
If you drawdown tolerance is max 20% a year, you can never, ever put a bet size of 20% or more per trade. If you have two losers in a row, you are down 40%... How would you psychology react to that?
I would try to smooth out the equity curve(and emotions) with a bet size between 3% and max 6% of your capital. With 6% pushing it...
Thanks, I appreciate looking at this from all angles, so I welcome all input.
My drawdown on total capital (assuming I bet 50% of capital) is roughly 15% after one loss.
The chances of me having 2 losses in a row are 0.17 * 0.17 = 3%. That's quite a high chance.
Should I suffer 2 losses in a row, I'd be down close to 30% of my initial capital. So that's more than I was initially prepared to tolerate, so I might have to rethink this.
The chances of 3 losses in a row are 0.5%. In real life, I'd say it's probably higher than that, let's be conservative and double it and say 1%. That's still quite significant.
Should I suffer 3 losses in a row, I'd be down 38.5% of my initial account.
Should I bet 1/2 Kelly, i.e. 25% of my account, these are the rough numbers:
Probability of one loss = 17%
Loss on total capital after 1 loss = 7%
Probability of two consequetive losses = 3%
Loss on total capital after 2 losses = 14%
Probability of three consequetive losses = 0.5%
Loss on total capital after 3 losses = 20%
Thanks everyone for helping me think through this. Really appreciate it.
