The Kelly criterion - is it good...or bad?

Quote from kut2k2:

I don't know what you mean by "trade odds" but fortunately I don't need them. My Kelly fractions are based entirely on trade returns, which are calculated with complete accuracy. This is obvious from the Kelly equation which I have repeatedly referenced in this thread and elsewhere.
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Your Kelly fraction will be calculated based on your current backtest and live results. If the characteristic of your future live results is going to differ significantly, then your current Kelly fraction may be over or understated.
 
Quote from traderFJ:

Your Kelly fraction will be calculated based on your current backtest and live results. If the characteristic of your future live results is going to differ significantly, then your current Kelly fraction may be over or understated.
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If you bothered to look at the Kelly equation, you'd realize that it is not static. Ergo, the Kelly solution is not fixed, it is adaptive.

In a drawdown (aka a series of loses), the Kelly fraction will shrink, thus reducing exposure (aka risk).

In a series of wins, the Kelly fraction will grow, thus increasing profits.

It's as easy to use adaptive Kelly in a backtest as in live trading. It's all good. :cool:
 
Quote from Swan Noir:

For most traders the key to position sizing is not how to optimize but how to comfortize. Figure out where you are comfortable on the capital base you have at any given time even if that means you are leaving some money on the table.

You are a better trader when you can afford to take losses at the appropriate moment and not let it bum you out; and when you can let the right trades run and not be greedy to take even a penny off the table begore its time. These trade management decisions are very difficult and making them even more difficult by being even slightly outside your comfort zone is really stupid. The key is to find trades that fit for your plan and manage accordingly not to optimize size.

PS ... if you are an accomplished, profitable trader who is scaling up from really solid money to big and then hopefully huge money ignore what I have said. That applies to very few traders and I am not trying to advise them -- they do not need it!
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Those who are looking for comfort can always use fractional Kelly instead of full Kelly. But both require knowing what the real Kelly fraction is. Just guessing what position size to use is so suboptimal, it is actually detrimental.
 
For the vast majority of traders optimal is not only irrelevant but dangerous. They know when they are exceeding their comfort level and should pull back to what has been refeered to as the "sleeping point".

As I've said for those experienced, accomplished traders optimizing is important. For all others it, as a general rule, obscures what is truly important -- COMFORT!

The title of this thread is: "The Kelly criterion - is it good...or bad?" I have tried to point out that while it is a good tool -- maybe even an essential tool -- for some it is not a tool that most here on ET should be using. BTW ... I don't recommend using fractional comfort. Take a bit less but trade in your comfort zone in the early years.

Quote from kut2k2:

Those who are looking for comfort can always use fractional Kelly instead of full Kelly. But both require knowing what the real Kelly fraction is. Just guessing what position size to use is so suboptimal, it is actually detrimental.
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Quote from Swan Noir:

For the vast majority of traders optimal is not only irrelevant but dangerous. They know when they are exceeding their comfort level and should pull back to what has been refeered to as the "sleeping point".

As I've said for those experienced, accomplished traders optimizing is important. For all others it, as a general rule, obscures what is truly important -- COMFORT!

The title of this thread is: "The Kelly criterion - is it good...or bad?" I have tried to point out that while it is a good tool -- maybe even an essential tool -- for some it is not a tool that most here on ET should be using. BTW ... I don't recommend using fractional comfort. Take a bit less but trade in your comfort zone in the early years.
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You apparently misunderstand fractional Kelly, which is not "fractional comfort". Perhaps you should read up on fractional Kelly before cavalierly dismissing it as inappropriate. It's very popular among certain traders for good reason.

All I'm saying is picking an arbitrary "comfort size" like 2% sounds OK in theory, but if you know you can risk a little more via fractional Kelly and still be reasonably safe, or if you know you should be risking less than the arbitrary amount because your strategy is dying off and your fractional Kelly value confirms this, then that's a kind of comfort that arbitrary guesswork can't buy.
 
Fair enough. Any tool that helps people find that comfort level may be of value.

Quote from kut2k2:

You apparently misunderstand fractional Kelly, which is not "fractional comfort". Perhaps you should read up on fractional Kelly before cavalierly dismissing it as inappropriate. It's very popular among certain traders for good reason.

All I'm saying is picking an arbitrary "comfort size" like 2% sounds OK in theory, but if you know you can risk a little more via fractional Kelly and still be reasonably safe, or if you know you should be risking less than the arbitrary amount because your strategy is dying off and your fractional Kelly value confirms that, then that's a kind of comfort that arbitrary guesswork can't buy.
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Kelly has a major problem in that it assumes your amount can go infinitely small. This is not true, because once the dollar amount goes below a certain amount in your account it's the same as being broke.
 
Quote from kmgilroy89:

Kelly has a major problem in that it assumes your amount can go infinitely small. This is not true, because once the dollar amount goes below a certain amount in your account it's the same as being broke.
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good point !
 
Quote from kmgilroy89:

Kelly has a major problem in that it assumes your amount can go infinitely small. This is not true, because once the dollar amount goes below a certain amount in your account it's the same as being broke.
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That's not a problem with Kelly, that's a problem with your sucky strategy that drains your account down to nothing. :eek:
 
I agree. Sizing, money mgm't and all the rest still need to rest on a positive expectation.

Quote from kut2k2:

That's not a problem with Kelly, that's a problem with your sucky strategy that drains your account down to nothing. :eek:
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