Can anyone explain this contradiction?

[robster970]

Here are some stats from my automated trading system and it's forward testing:

Win% - 39.93%
Risk:Reward - 1.36
Average Win - £78.00
Average Loss - £38.22

So if I use a risk adjusted weighting,

(0.3993 x £78.00) - (0.6007 x £38.22) = 31.14 - 22.96 = 8.18

So on this basis the system trades positively (sample size, 293 trades)

If I work out the Kelly value for this though, it comes up as -4.24% - bad as it's negative. Putting these numbers in here over the same sample size shows an eventual demise of the account. Random Equity Curve Simulator of a trading system. Learn it before you trade

So what's right. The Kelly value or the risk adjusted weighting and why do the two seem to contradict each other?

 

[Rhody Trader]

You must be doing something wrong with the Kelly. When I plug the figures in I get .104. My guess is you're plugging in your Risk:Reward figure, which to be honest I have no idea where it's coming from. You should be plugging in the Win/Loss ratio which is 2.04.

 

[TheBramble]

I'm getting 8% on my model.

 

[robster970]

You must be doing something wrong with the Kelly. When I plug the figures in I get .104. My guess is you're plugging in your Risk:Reward figure, which to be honest I have no idea where it's coming from. You should be plugging in the Win/Loss ratio which is 2.04.

I'm calculating the R:R ratio as the total amount won (i.e. trade value > 0) divided by the total amount lost (i.e. trade value < 0) by the system over the 293 trades. It comes out as 1.36

I thought it was supposed to be calculated that way rather than the average win/average lose.

Have I been going wrong all this time?

e2a - you can see how the system comes up with the mystical 1.36

(0.3993 x £78.00)/(0.6007 x £38.22) = 1.36

 

[robster970]

The good thing for me is that the system is behaving better than I expected.

Thanks for the spot chaps.

 

[Rhody Trader]

I'm calculating the R:R ratio as the total amount won (i.e. trade value > 0) divided by the total amount lost (i.e. trade value < 0) by the system over the 293 trades. It comes out as 1.36

I thought it was supposed to be calculated that way rather than the average win/average lose.

Have I been going wrong all this time?

e2a - you can see how the system comes up with the mystical 1.36

(0.3993 x £78.00)/(0.6007 x £38.22) = 1.36

What you're calculating is expetency.

The Risk/Reward ratio has nothing at all to do with probability. It's just the ratio of what you are risking on each trade against what you are targeting or expecting to make.

 

[robster970]

What you're calculating is expetency.

The Risk/Reward ratio has nothing at all to do with probability. It's just the ratio of what you are risking on each trade against what you are targeting or expecting to make.

Thanks for clearing that up for me John.