My journey to long term consistency

[DrSafari]

Demo account

Short BBBY
400 Shares
Reason of closure: stop loss got hit

Opening rate: 45.5
Opening time: 5/3/2016 5:01 PM

Close rate: 46.05
Close time: 5/3/2016 5:55 PM

Amount risked: €‪ 187.57

Net P/L: €‪-191.10‬

Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 15 min chart.




Personal notes
I opened this trade from my previous system, so that is not yet the system in last post (not that it matter much in this case). Anyway, this is a gappy stock again. Again the gap is not that wide but gappy nonetheless. Many bad experiences with stocks that are gappy so I really have to define what constitutes as a gap. For now I'm going to leave it as being an obvious white space between two candles on the 15 minute chart. I realise this can only happen upon opening of the market, else it would be just a taller candle. For now this is enough, I'll leave it to my judgement if it "gaps" during trading hours itself.

Of course I also have the rule of not trading the 1st hour the market is open. Was the reason for this so that I could determine whether the trend of gappy stocks would be confirmed after 1 hour and I can take a position anyway? Or was the reason just to know the trend of that stock will continue? If the former than my wait 1 hour rule after market opens is not valid anymore. I will look this up in my journal.

 

[DrSafari]

Looks like the rule was put in place just to know whether the trend of that stock continued or not so all rules stay in place. Will update the plan accordingly.

 

[DrSafari]

Plan Demo Account including new findings:

1) Deciding whether to trade or not
-before deciding to trade look if any major economic events are up in the current trading day if yes then we DO NOT TRADE unless after 1 hour of occurence
-before deciding to trade: check yahoo finances whether something big is up or not. If it is DO NOT TRADE


2) Find potential trades
- Wait at LEAST 1 hour after trading has opened before taking up a position
- Wait at LEAST 1 hour after the occurence of a major economical event or indicator (1)
- Look at the S&P500 and the stocks in your watchlist. Watch if most of them are in the plus or in the min. Dont go long if in the min and dont go short if in the plus.
- scan american stocks and look for clean charts (whether up or down determinded in previous point). Clean is a rising or falling 10 period WMA with no interruptions for at least 3 trading days (2)
- do not include stocks that gapped opun opening of that day. Gap meaning an obvious white space between two candles on the 15 minute chart
- do not include stocks that require me to take stop losses wider than 2% of my equity
- the last three bars (2h) should go with the trendline, else dont take it



3) Taking positions
- look for the trend and 66% of the highest difference in opposite direction of the entire trend is where I place my stop loss
- I am not going to risk more than 2 % on each trade



4) Once in a position
- Make it a trailing stop loss
- Once the trade reaches 75% profit of amount risked move the SL to break even.
- Once the trade reaches 100% profit of amount risked move the SL to 50% profit (of what was the SL)

- Exit only if stop loss hits
- document every trade carefully in journal (with charts) saying what you did and what I should have done

Since the system changed again I will evaluate after 40 trades (or sooner if it seems totally worthless like I did many times already)

(1) If this is the case I am allowed to look at the 15min charts to check whether trend continues or not

(2) if the 10 period WMA goes against its own trend (for even one period) or it stays the same for 3 consecutive periods then the trend is broken


------------------------------------------------------------------
I added a rule about gapping only upon opening of that trading day. I just took a trade that did gap the previous 3 days (but not that trading day) and it turned out to go very good (it is still running) I realise this rule is not good and defeats the purpose of that rule. If a stock is going to react because it gapped it is going to happen that trading day and not 2-3 days later. Why did I defy my system this time? The chart looked just too good. Could not resist taking it. Turned out I was right. My trading spidey sense was tingling, one should not act upon it but since I am testing still and developing my trading and thinking about the rule and coming to the conclusion that it did not make much sense, I did acted anyway

 

[DrSafari]

Demo account

Short Colfax
300 Shares
Reason of closure: adjusted stop loss got hit

Opening rate: 27.1
Opening time: 5/4/2016 4:35 PM

Close rate: 25.12
Close time: 5/9/2016 4:04 PM

Amount risked: €‪ 167.15

Net P/L: +€‪519.07‬

Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 15 min chart.




Personal notes
This is the trade which I entered despite a gap. However, I did realise that the trend continued and the chart looked really good, like the falling candles of MrCharts so I entered anyway. This is under the system I posted previous post. No reason to exclude gappy stocks if the trend is clearly visible and the gap occored in another trading day. Hence my new system. Nice profit obviously.

 

[DrSafari]

Demo account

Long Iron Mountain
500 Shares
Reason of closure: adjusted stop loss got hit (75% rule)

Opening rate: 38.18
Opening time: 5/9/2016 4:44 PM

Close rate: 38.18
Close time: 5/9/2016 9:38 PM

Amount risked: €‪ 149.2

Net P/L: €‪0.0


Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 15 min chart.




Personal notes
Looks like my new 75% rule is already paying off. This trade was break even but could have resulted in a 35ish euro loss with my old rules. If I really had used a trailing stop (intead of monitoring and adjusting) I would have even had a profit. I wasnt able to monitor the trade though when it was going even further up so I didn't put my SL higher either resulting in being break even instead of profits



TODO: My broker has the possibility to use an automatic trailing stop but I tried it once and it didn't do what I wanted while I do get the concept just fine. I should look into this again and figure out how to use it properly

 

[DrSafari]

Demo account

Long Macerich
400 Shares
Reason of closure: stop loss got hit

Opening rate: 81.2
Opening time: 5/10/2016 4:45 PM

Close rate: 80.74
Close time: 5/10/2016 5:25 PM

Amount risked: around €‪ 161 I think, that data is not on this pc

Net P/L: €‪-161.55‬


Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 15 min chart.





Personal notes
Put my stop loss pretty narrow since it was a very steady rise, chart looked nice but got my stopped out prematurely. However I wouldnt have gained much anyway cause a massive sell off occured later LOL, funny trade.

 

[DrSafari]

Demo account

Long Molson Coors Brewing
300 Shares
Reason of closure: stop loss got hit

Opening rate: 100.09
Opening time: 5/10/2016 6:33 PM

Close rate: 99.44
Close time: 5/11/2016 6:08 PM

Amount risked: around €‪ 172 I think, that data is not on this pc

Net P/L: €‪-172.80‬


Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 15 min chart.





Personal notes
Trend stopped after I entered the trade and went in a range, and then went down hitting my stop, not much to say about that. It happens.

 

[DrSafari]

REAL ACCOUNT

Short Tesco
2000 Shares
Reason of closure: trade stayed pretty much put and since it wasnt going anywhere I decided to cut the risk and close the position. I waited until there was a small profit instead of a small loss.

Opening rate: 158.75
Opening time: 5/9/2016 9:57 AM

Close rate: 158.32
Close time: 5/10/2016 3:28 PM

Amount risked: around €‪ 98

Net P/L: + €‪10.65‬


Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 30 min chart for a change else the screen didn't fit the trending chart.




Personal notes
Wasnt trending anymore but ranging so I closed to not be exposed to risk anymore, however, today it went down again. I think this is because of the bad Jobless claims figure from the USA, my other real account trade also went from +60 to break even and hit my stop loss sadly enough. But stuff like this happens. I should have closed this position and shorted this one.... but all of that is easy in hindsight of course.

 

[DrSafari]

REAL ACCOUNT

Long Thy
200 Shares
Reason of closure: adjusted stop loss got hit

Opening rate: 18.89
Opening time: 5/11/2016 11:51 AM

Close rate: 18.9
Close time: 5/12/2016 3:57 PM

Amount risked: initially €88

Net P/L: €‪1.74‬


Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 15min chart.



Personal notes
Was going in the right direction but then stopped and reversed. Was 60 € int he plus so decided to put the SL just above break even. I believe it reversed because of the bad jobless claims figure from the USA but could just as well be something else. Anyway I do think it is going to recover tomorrow so I have to watch it for another change to take a long position. We will see.

Oh yeah, maybe I should have closed at 35-40 when I knew about the bad jobless claims number and it being on yahoo finance and all instead of letting it hit my SL, but again, this stuff is easy said in hindsight.

 

[DrSafari]

REAL ACCOUNT

Long Bek
250 Shares
Reason of closure: manual close, I closed because the position was going towards my SL. Looking at the trend it seemed like the trend was broken. I had a feeling that it was going to go through my SL at the end of the day. (I was wrong )

Opening rate: 36.66
Opening time: 5/17/2016 11:39 AM

Close rate: 36.5
Close time: 5/17/2016 3:17 PM

Amount risked: initially €102.5

Net P/L: €-40


Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 15min chart.



Personal notes
I made the decision to exit the position as a gut instinct because obviously my stop loss hadn't been reached yet. I am less mechanical with my real account for the sole reason that I am making profit with my current approach. Alas I was wrong on this instance which is somewhat painful. I exited near and of day unfortunately right before it rallied up. When I looked at the chart later I was like FFFFFUUUUUUUUUUU . Now I am not emotional anymore about it. I still think it wasnt a bad disicion, this time I happened to be wrong but the trend I was following was obviously broken, it was steadily going down.... perhaps my SL was a bit too wide as well. Anyway If I had held it until now (end of chart) I would have a nice profit.... or not because at low of the orange circle my adjusted SL would most likely have been hit. Of course it would have been better than a 40 euro loss. Frustrating trade but thats the name of the game.

Current Equity: € 5 162.53

 

[DrSafari]

Demo account

Long Ventas
200 Shares
Reason of closure: stop loss got hit

Opening rate: 67.44
Opening time: 5/16/2016 5:09 PM

Close rate: 66.7
Close time: 5/17/2016 3:31 PM

Amount risked: €‪ 128.85

Net P/L: €‪-131.67‬


Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 15 min chart.





Personal notes
Went down after I got in, simple as that. This shows how important it is to get out soon if a trade is not working.

 

[DrSafari]

Demo account

Long Ugi
400 Shares
Reason of closure: adjusted stop loss got hit

Opening rate: 42.54
Opening time: 5/16/2016 5:06 PM

Close rate: 42.42
Close time: 5/17/2016 4:31 PM

Amount risked: €‪ 148.27

Net P/L: €‪-43.66‬


Chart
Green arrow is where I opened position and red arrow is where it got closed. Chart is a 15 min chart.





Personal notes
On the chart it looked like I had profit but I didnt. I probably opend near the high of the candle where I opened and near the low of the candle where it got closed. That plus spread can explain the 40 € loss. Was winning some but then the trend reversed sadly.



======================================================================


I made one more trade on my demo account on the S&P500 futures index just for the heck of it. Its highly leveraged 1:294 . I saw a clear support line and the trend was starting to go up so all in all not a bad entry point. However it went through my stop loss, I am not yet wrong though, the index is still near the support line. I took smallest position size but my demo account is not big enough to trade with that much leverage, the SL should have been a bit wider and I would still be in that trade. Good warning to stay away from that instrument for the time being. This trade does not count in evaluating my system obviously.

 

[DrSafari]

My Kelly Criterion

REAL ACCOUNT

So since I started journaling here I made an analysis of my trades based on the kelly criterion. Here are the results (last trade not counted yet)



There are 34 trades of which 19 winners and 15 losers making my win probability 55,8 %

I made 1436,88 € on winners and lost 761,57 € on the losers making my win loss ratio 1,88

So my Kelly % = W – [(1 – W) / R] = 0,558 - ((1 - 0,558) / 1,88) = 0,323
(exact numbers are in the excel sheet)

So that's pretty good I've been told. It means that I can keep adding up to WINNING positions until 32% of my portfolio is risked as far as I understand it. But adding to winning positions isn't something I do yet but I can see this working though. My 400+ profit trade could have easily been a 900+ profit trade. I do have to find a right level as to when to add though. Cause I'll probably also have more losers like this when the trade is starting to reverse right after I added to the position. This probably can be calculated mathematically, an optimization problem... finally something useful I learned in school I can use for real life Need to look into it again though.

I am going to proceed to implement the adding to winners strategy on my demo account and I'll go from there. I just realised that generally in life the better I do the more cautious I become which is not a good trait to have in almost all of life's disciplines.... but I always had it and also have it in trading. Then again, can't be taking too much risk either.

 

[options-george]

REAL ACCOUNT

So since I started journaling here I made an analysis of my trades based on the kelly criterion. Here are the results (last trade not counted yet)

View attachment 225026

There are 34 trades of which 19 winners and 15 losers making my win probability 55,8 %

I made 1436,88 € on winners and lost 761,57 € on the losers making my win loss ratio 1,88

So my Kelly % = W – [(1 – W) / R] = 0,558 - ((1 - 0,558) / 1,88) = 0,323
(exact numbers are in the excel sheet)

So that's pretty good I've been told. It means that I can keep adding up to WINNING positions until 32% of my portfolio is risked as far as I understand it.

Great to see you keeping up the documentation! Documentation for me has been really helpful too. Well done!!

I read through your post above and am thinking that there are some misunderstandings in there, so thought I share my thoughts. (I have used Kelly a fair bit in the past).

The win ratio should not be calculated on the total amounts but on your average trades. Hence:

Average Win = 1437/19 = 75.60
Average Loss = 762/15 = -50.80

Thus your average win:loss ratio is 1.49

Then, multiply the average amounts by their probabilities

75.60 x 19/34 = 42.26
-50.80 x 15/34 = -22.41

Adding these two amounts together comes to 19.85

Dividing this number of 19.85 by your average loss figure of 50.80 gives a percentage of 39%. You should then divide that 39% by 1.49 (your RR ratio) - this gives a figure of 26.17.

Using full Kelly this implies that you should wager 26.17% of your bankroll on every trade. [A more conservative approach would be to use fractional Kelly, such as half-Kelly, quarter-Kelly etc]. Kelly is not about the idea of adding to winning positions - it's about determining the size of your original bet/trade.

The reason you are getting such a high figure is because your trading results imply a really high edge (39%) - as a comparison, getting an ace as a first card in a hand of blackjack gives you a 52% edge. This is most likely because you have only a small sample size of trades (34) on which you are performing these calculations.

My suggested answers here are quite different to what you have written above. I am not sure whether that makes sense to you. And of course, if I am giving you wrong answers, then I'd of course be happy for others to point out errors I might have made.

As a sidenote, I used the above approach to calculate statistics for my own trades (I have quite a few examples of that on my trading blog, here's one specific one riskmoney-management-introduction/, but then switched to using a "return on amount risked" approach - I found this more useful in order to provide for break-even trades in the sample as they seemed to distort my way for doing the Kelly calculations.

Again, it's really great that you are so diligent with the documentation and logging!! Please let me know if you want to discuss any of the above info in more detail. Once you get your head around these calculations, they can be very useful for helping in your trading business!

 

[DrSafari]

The win ratio should not be calculated on the total amounts but on your average trades. Hence:

Average Win = 1437/19 = 75.60
Average Loss = 762/15 = -50.80

Thus your average win:loss ratio is 1.49

Then, multiply the average amounts by their probabilities

75.60 x 19/34 = 42.26
-50.80 x 15/34 = -22.41

Adding these two amounts together comes to 19.85

Dividing this number of 19.85 by your average loss figure of 50.80 gives a percentage of 39%. You should then divide that 39% by 1.49 (your RR ratio) - this gives a figure of 26.17.

You are right, also makes more sense indeed! I altered my excel sheet with the correct version:

Using full Kelly this implies that you should wager 26.17% of your bankroll on every trade. [A more conservative approach would be to use fractional Kelly, such as half-Kelly, quarter-Kelly etc]. Kelly is not about the idea of adding to winning positions - it's about determining the size of your original bet/trade.

Thats what I read everywhere yes, that it's about determining the size of my original bet/trade, but I find 26% to be a bit on the high side for that. You are not supposed to risk more than 2% of your equity.... but maybe that's not what the percentage means and I'm misunderstanding it? Maybe it just means you shouldn't use more than 26% of your equity to go long or short on one position which is not the same as the amount you are risking (where your stop loss is). If that is the case, then how do you go about it when you use leveraged products?

Anyway, I got the idea of using Kelly for adding to a winning position from one of Anton Kreill's video courses. He advocates it using in this way, and I dont think it's a bad idea, but I could be wrong.

The reason you are getting such a high figure is because your trading results imply a really high edge (39%) - as a comparison, getting an ace as a first card in a hand of blackjack gives you a 52% edge. This is most likely because you have only a small sample size of trades (34) on which you are performing these calculations.

Possibly, time will tell I guess

My suggested answers here are quite different to what you have written above. I am not sure whether that makes sense to you. And of course, if I am giving you wrong answers, then I'd of course be happy for others to point out errors I might have made.

They do make sense, but some questions arise too.

As a sidenote, I used the above approach to calculate statistics for my own trades (I have quite a few examples of that on my trading blog, here's one specific one riskmoney-management-introduction/, but then switched to using a "return on amount risked" approach - I found this more useful in order to provide for break-even trades in the sample as they seemed to distort my way for doing the Kelly calculations.

Thanks, I will check it out.

Again, it's really great that you are so diligent with the documentation and logging!! Please let me know if you want to discuss any of the above info in more detail. Once you get your head around these calculations, they can be very useful for helping in your trading business!

Thanks, I am very determined to become a consistently profitable trader so I am trying to be as disciplined as possible to get this handled.

 

[options-george]

Hey DrSafari,
thanks for replying to my post - I will go through the questions that you raised in your initial paragraph (hopefully the answer has somewhat of a structure to it (in your eyes) and makes sense!).

The figure of 26% does actually mean exactly that - it's the amount of your trading bankroll that you are meant to risk on each single trade. This assumes full Kelly and assumes that your edge and reward-risk ratio from your sample is actually accurate and reflective of the strategy's long term effectiveness. Betting 26% gives you the optimal combination of maximum bankroll growth whilst minimizing the possibility of going bankrupt (i.e. losing your entire bankroll). If you were to lose the first trade, you would then risk 26% of your remaining capital on the next trade.

This seems ludicrous right? But think about this way. If your statistics are correct then you are proposing a coin-tossing game where the coin is biased to the extent that it will win 19/34 times, rather than 17/34 as a non-biased coin would. Additionally each time that you win the coin toss you will get 1.49 times more than you lose - that's a very good proposition.

When using Kelly, in most times traders/gamblers like to use fractional Kelly because they find full-Kelly difficult to handle it psychologically and/or they like to be conservative particularly if they are trading/gambling full-time and their bankroll is not easily replenishable from other income sources.

When estimating the edge on a trading strategy on the past of demo/testing/past results, it is wise to always discount the implied edge, as the real results are more likely than not going to be worse.

The rule of risking 1% or 2% on a trade actually has little mathematical basis - it is purely something that has come about over time - with it constantly being reaffirmed on trading forums and in courses. In a nut shell, retail traders who trade very well, are probably always undersizing their trades.

Even professional traders have this problem - a friend of mine who owns a hedge fund asked me to make a presentation to his dozen traders to explain the concept of bet sizing on the basis of edge - because he is often frustrated that they are not getting it (I used casino games as an analogy in the presentation).

Whether or not you are using leverage doesn't impact on the bet-sizing answer. Basically take your calculated $ risk per position, your intended initial stop loss, and then calculate your appropriate position size.

To clarify, the 26% figure has nothing to do with adding to positions and/or what your total market exposure is.

The 26% assumes that you are only taking one position at a time - i.e. you do not have positions open simultaneously.

One other point to note - the Kelly formula takes only two factors into account - your edge and your risk-reward ratio. Assuming you have two different strategies with the same edge, but different risk-reward ratios, then Kelly tells you that you should risk more money on trades that uses the lower risk-reward ratio (the lower ratio strategy will of course have a higher win rate). Thus, if you are choosing between two strategies, always take the one with the lower ratio, because you will make higher $$ returns in the long run.

 

[DrSafari]

The figure of 26% does actually mean exactly that - it's the amount of your trading bankroll that you are meant to risk on each single trade. This assumes full Kelly and assumes that your edge and reward-risk ratio from your sample is actually accurate and reflective of the strategy's long term effectiveness. Betting 26% gives you the optimal combination of maximum bankroll growth whilst minimizing the possibility of going bankrupt (i.e. losing your entire bankroll). If you were to lose the first trade, you would then risk 26% of your remaining capital on the next trade.

This seems ludicrous right? But think about this way. If your statistics are correct then you are proposing a coin-tossing game where the coin is biased to the extent that it will win 19/34 times, rather than 17/34 as a non-biased coin would. Additionally each time that you win the coin toss you will get 1.49 times more than you lose - that's a very good proposition.

Hmm this is most interesting. I am a programmer so I couldn't help myself to write a small program that assumes a winning outcome 19/34 times and that IF I win I will win 1.49 times more than if I lose, risking 26% of my equity each time. Starting with an equity of 5200. Everything random but within these parameters.

I let it run for 100 test cases in which each test case I run 150 trades with a starting equity of 5200. The outcome was that I made somewhere between 30 000 worst case and over 10 million in the best cases. But the really surprising part was that on 100 test cases I didnt even go bust once.

Anyway maybe I made a mistake in the script but I dont think so. I can post the code verbatim here but Im not sure if you can read java code? Else I could try to write it here in pseudo code so you can understand it better.

What does this mean for me? Assuming the statistics are right. I can start using a conservative version of this kelly criterion AND evaluate it again after each trade in case things start going wrong.

When estimating the edge on a trading strategy on the past of demo/testing/past results, it is wise to always discount the implied edge, as the real results are more likely than not going to be worse.

Yeah, I am going to wait a bit more so I have a bigger sample size and thus more certainty of the statistics being correct and then start with a conservative version of the Kelly Criterion.

The rule of risking 1% or 2% on a trade actually has little mathematical basis - it is purely something that has come about over time - with it constantly being reaffirmed on trading forums and in courses. In a nut shell, retail traders who trade very well, are probably always undersizing their trades.

I guess its best to err on the side of being to safe than being too risky. But I strongly believe in maths and if you re-evaluate after each trade I think a conservative version of the criterion wouln't be a bad thing.

Whether or not you are using leverage doesn't impact on the bet-sizing answer. Basically take your calculated $ risk per position, your intended initial stop loss, and then calculate your appropriate position size.

Yes indeed

To clarify, the 26% figure has nothing to do with adding to positions and/or what your total market exposure is.

The 26% assumes that you are only taking one position at a time - i.e. you do not have positions open simultaneously.

Got it.

One other point to note - the Kelly formula takes only two factors into account - your edge and your risk-reward ratio. Assuming you have two different strategies with the same edge, but different risk-reward ratios, then Kelly tells you that you should risk more money on trades that uses the lower risk-reward ratio (the lower ratio strategy will of course have a higher win rate). Thus, if you are choosing between two strategies, always take the one with the lower ratio, because you will make higher $$ returns in the long run.

Yes makes perfect sense!

Thanks for your very thorough replies, I feel like I have learned a ton once more!!

 

[options-george]

Cool!! I am very glad that my explanations made sense to you!
I also agree with all your comments re increasing sample size and being conservative.

In terms of the script that you wrote -
that is very interesting. Technically you should never go bust since you are never betting your entire bankroll, but only ever 26% of what's remaining of it. So in practice you could go bankrupt if the bankroll decreases to such a small size that you can no longer put on a trade.

However your simulation results don't surprise me - this demonstrates the power of Kelly betting!

Recall that your edge was 39% - so by betting 26% on each trade - you effectively have an expectancy of 39% x 26% = 10.1% return on your bankroll - on every trade. So it's no wonder that the $5,200 figure can turn into huge numbers after 150 trades.

Is that realistic? Is the edge really 39%? How much of a fractional Kelly bet can a trader be comfortable with? Well I am sure you are already thinking about these points!

I am not a programmer. That said, I would love to get my hands on the simulator that you created - it would be incredibly useful to me - would that be all right? [Pretty please with sugar on top!]

Before applying a Kelly-based approach, you might want to do more research on the idea of using Kelly betting for the financial markets - there must already be a lot of online material related to that question.

One other thought I had - you calculated an average win and average loss size - however, there is actual quite some variance among the results of the individual trades that you took. So you might need to adjust for that also - using average win and average loss could be misleading.

You could also consider reclassifying your trades in terms of winners/losers/scratch trades. You could treat everything between -0.1R and +0.1R as a scratch trade or you could classify every result less than +0.1R as a losing trade. I have played around with both of these approaches.

 

[options-george]

Dr Safari, I came across an article in 'Automated Trader' (Issue 39, Q1/2016) regarding the use of kelly betting for the financial markets. The magazine is somewhat difficult to get hold of (and it costs £75 per issue!).

Let me know if you want to discuss it. It addresses the issue of unequal win and loss amounts and the likelihood of overbetting when using Kelly.

 

[DrSafari]

In terms of the script that you wrote -
that is very interesting. Technically you should never go bust since you are never betting your entire bankroll, but only ever 26% of what's remaining of it. So in practice you could go bankrupt if the bankroll decreases to such a small size that you can no longer put on a trade.

Ah yes of course, very good remark, should have thought of that. I will make new test runs and see how often I get bust if I consider 1000, 500, etc to be my equity limit for being bust

Is that realistic? Is the edge really 39%? How much of a fractional Kelly bet can a trader be comfortable with? Well I am sure you are already thinking about these points!

Yes indeed, it's best to overestimate your edge and use conservative Kelly, but still that would be great tool to determine your bet sizes. And what if you first start using bigger positions and your first few trades are losers? Doubt would probably sink in. Another way to go about this is to gradually increase to whatever bet size you determined using a conservative version of Kelly. That way a few losing trades won't cause too much trouble psychologically speaking.

I am not a programmer. That said, I would love to get my hands on the simulator that you created - it would be incredibly useful to me - would that be all right? [Pretty please with sugar on top!]

Sure, but I need some time to adapt it into a usable version.

Before applying a Kelly-based approach, you might want to do more research on the idea of using Kelly betting for the financial markets - there must already be a lot of online material related to that question.

Yeah, I'm not there yet.

One other thought I had - you calculated an average win and average loss size - however, there is actual quite some variance among the results of the individual trades that you took. So you might need to adjust for that also - using average win and average loss could be misleading.

If I understand you correctly I should have taken that into account already. The amount risked is always a constant number, lets say R. The amount you win on average is 1.49 * R. What I did is for winning trades is I generated a random number between 0 and 1.49 * R and added that to the equity. For losing trades I generated a random number between 0 and R and subtracted that from the equity. That way the 1.49 ratio should have been enforced also whilst introducing the element of randomness. If there is a better way for it Im all ears though.

Of course it is not 100% realistic because your winning trades sometimes exceed 1.49 * R. So I think this simulation is even more pessimistic than the reality (or I am missing something)

Something I am just thinking of, the way I wrote the script means that the risk size is actually less from 26% because I am using random numbers between 0 and the risk size. Since it is random we can assume that after many runs each number between 0 and R will have been used an equal amount of times so this way I am actually using HALF of my suggested risk. This can be adapted too though.

You could also consider reclassifying your trades in terms of winners/losers/scratch trades. You could treat everything between -0.1R and +0.1R as a scratch trade or you could classify every result less than +0.1R as a losing trade. I have played around with both of these approaches.

Yeah also a good point for improvement!