Lets not forget that we can literally only bet 1% of our capital on system 2 to go bust. So one major factor in evaluating which system is better, is the bet size. If we plot the win/loss percentages for systems 1 and 2 into excel and create a simulation of 1000 trades. We'll easily see that system 1 far outperform system 2, just by the fact that you can place a larger percent of your capital on each bet without risking too much.
Which system is better?
- Thread starter kut2k2
- Start date
Yes, the Kelly fraction is an excellent performance metric, which is why I included it in my own composite performance metric.
http://www.elitetrader.com/vb/showthread.php?threadid=270199
I was going to add a comment on Kelly in my post, but I decided not to. Basically, using Kelly here would be meaningless, no matter what it tells you, 1% of capital will be your max bet on system 2.
As an example:
If you allow for a max 10% loss on your capital. You can only bet 0,10% of your total capital on system 2. On system 1, however, you can bet 10% of your total capital. The edge you get from being able to bet 10% as opposed to 0,10% far outweighs the edge you have in expectancy from system 2. You'd need an expectancy of 20+- on system 2 to even compare to system 1.
Basically what Kelly tells you is that betting 1% of your capital would be disastrous, given that the Kelly fraction is less than a quarter percent.
Using your logic, a braver trader willing to risk losing up to 30% of his capital should risk 0.3% per trade, but knowledge of Kelly would inform him that he is overtrading.
You can ignore Kelly in your trading but that's not the optimal play to make.