What's your most comfortable account margin level?

Does the Kelly Criterion works for you to set the best margin level

  • Yes

    Votes: 1 20.0%

  • No

    Votes: 4 80.0%
  • Total voters
    5
L

lx008

What's your most comfortable account margin level? Does the Kelly Criterion works for you to set the best margin level?
 
Your question is confusing since Kelly is usually referred to trade/bet size and not margin account.

I will comment on trade size: I found full Kelly too aggressive and too risky as some posters counseled me. If you look at a Kelly plot it usually looks like this:

upload_2017-8-26_8-51-43.png


Optimized return is too close to the cliff and since the parameters in Kelly is changing as I trade, so it is just an estimate. I back off to half Kelly but am still analyzing.
 
nonlinear5 said:
The Kelly fraction of 0.2 to 0.3 is a reasonable one.
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The problem in practice, though, is that people who are trying to use this and asking about position-sizing in a forum tend to be those not very well versed in the skill of calculating their expectancy accurately and with a high degree of confidence, and the Kelly formula, whatever fraction of its output you decide to use (and I think your suggestion for that is a very reasonable one), really does rest on that being reliable and accurate.

It's one of these situations (very widely encountered in forums!) where the aspiring traders most in need of the advice are also the least well equipped to use it productively.
 
lx008,

My other thoughts on trading/margin and on Kelly:

1. The most important aspect is to develop a winning method and achieve positive expectancy.

2. If I don't have an edge/positive expectancy, the only fraction that makes sense is zero. Any other fraction will lead to ruin.

3. If I don't have an edge/positive expectancy, trade a few times and quit while I am ahead (when I get lucky) is the best strategy, like playing the lottery. Trading small and frequent only guarantees I will get wipe out, slowly.

4. The experts and ET pros all said: Don't risk more than 10-20% of your assets on trading and keep the risk of each trade to 1-2% of your trading capital.

5. I can use this to work out a combined R:R ratio and win rate that I should have in order to survive long term. You might want to find you combined R:R and win rate and go from there.
 
Xela said:
The problem in practice, though, is that people who are trying to use this and asking about position-sizing in a forum tend to be those not very well versed in the skill of calculating their expectancy accurately and with a high degree of confidence, and the Kelly formula, whatever fraction of its output you decide to use (and I think your suggestion for that is a very reasonable one), really does rest on that being reliable and accurate.

It's one of these situations (very widely encountered in forums!) where the aspiring traders most in need of the advice are also the least well equipped to use it productively.
More...
Your comment actually applied to me until quite recently. For the longest time, I was assuming to get maximum returns, I had to be 100% invested in the assets with the highest potential returns. Of course highest return often meant highest risks. Good thing I wasn't leveraged.

Now that I trade options exclusively things are very different. Option trading is high leverage, much more than on margins. Fortunately I found ET and started to pay attention to risk management.

I used to question the conventional wisdom of many of you who stated: Don't risk more than 10-20% of your capital trading, limit the risk of each trade to 1-2%. Now, after studying Kelly and other risk management techniques, I calculated my own risk profile and indeed the conventional wisdom applies to me too. To anyone new to day trading or trading options like me, this is probably the most important rule to follow other than having a method with positive expectancy.

I always enjoyed reading your posts.

Regards,
 
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