Kelly Bet Sizing - Trading-Lab

Leth · #1 12-05-2007, 01:00 PM

Kelly Betting systems play a role in many trend following systems. Here are the logistics...

Kelly criterion

In probability theory, the Kelly criterion, or Kelly formula, is a formula used to maximize the long-term growth rate of repeated plays of a given gamble that has positive expected value. It was described by J. L. Kelly, Jr, in a 1956 issue of the Bell System Technical Journal[1]. The formula specifies the percentage of the current bankroll to be bet at each iteration of the game. In addition to maximizing the growth rate in the long run, the formula has the added benefit of having zero risk of ruin; the formula will never allow a loss of 100% of the bankroll on any bet. An assumption of the formula is that currency and bets are infinitely divisible, which is not a concern for practical purposes if the bankroll is large enough. - Wikipedia

The Kelly formula is : Kelly % = W - (1-W)/R where:

W = Historical winning percentage of a trading system.
R = Historical Average Win/Loss ratio.
Kelly % = percentage of capital to be put into a single trade.

This is calculated before each enter order.

Orders available:

BuyOpen, BuyStop, SellOpen and SellStop

This MM will short and will pyramid if account options set.

There are several points you will need to understand before using this money management object.

Since this MM uses "historical trading" performance, you have to consider what should happen before there are enough trades to be statistically meaningful.

The Kelly formula can produce negative values, which could be viewed as do not trade. If this were made into a rule, then the system would stop trading. Perhaps it should! In the cases where the Kelly formula produces a negative value, a warning will be given and 10% of trading cash will be invested for the next order.

A maximum of 50% of Cash will be invested - any Kelly values higher than this will be reduced to 50%.

All these values can be changed in the PositionSize function.

To see an example of how Kelly Bet Sizing is used; check out the Bet Size rules and Failsafe rules in the Building Trading Systems article below...

http://www.trading-lab.com/forums/bu...tems-t196.html

breakout · #2 12-05-2007, 03:39 PM

that's interesting I had never heard of this Kelly system.

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#1 12-05-2007, 01:00 PM
Leth Super Moderator Join Date: Oct 2007 Posts: 621	Kelly Bet Sizing Kelly Betting systems play a role in many trend following systems. Here are the logistics... Kelly criterion In probability theory, the Kelly criterion, or Kelly formula, is a formula used to maximize the long-term growth rate of repeated plays of a given gamble that has positive expected value. It was described by J. L. Kelly, Jr, in a 1956 issue of the Bell System Technical Journal[1]. The formula specifies the percentage of the current bankroll to be bet at each iteration of the game. In addition to maximizing the growth rate in the long run, the formula has the added benefit of having zero risk of ruin; the formula will never allow a loss of 100% of the bankroll on any bet. An assumption of the formula is that currency and bets are infinitely divisible, which is not a concern for practical purposes if the bankroll is large enough. - Wikipedia The Kelly formula is : Kelly % = W - (1-W)/R where: W = Historical winning percentage of a trading system. R = Historical Average Win/Loss ratio. Kelly % = percentage of capital to be put into a single trade. This is calculated before each enter order. Orders available: BuyOpen, BuyStop, SellOpen and SellStop This MM will short and will pyramid if account options set. There are several points you will need to understand before using this money management object. Since this MM uses "historical trading" performance, you have to consider what should happen before there are enough trades to be statistically meaningful. The Kelly formula can produce negative values, which could be viewed as do not trade. If this were made into a rule, then the system would stop trading. Perhaps it should! In the cases where the Kelly formula produces a negative value, a warning will be given and 10% of trading cash will be invested for the next order. A maximum of 50% of Cash will be invested - any Kelly values higher than this will be reduced to 50%. All these values can be changed in the PositionSize function. To see an example of how Kelly Bet Sizing is used; check out the Bet Size rules and Failsafe rules in the Building Trading Systems article below... http://www.trading-lab.com/forums/bu...tems-t196.html __________________ Nothing is more difficult than the art of maneuvering for advantageous positions. - Sun-Tzu Trade with the trend, Ride winners, Cut losers, Keep bets small, Use Stops - Old School Last edited by Leth : 12-06-2007 at 05:00 AM.

#2 12-05-2007, 03:39 PM
breakout Member Join Date: Jun 2007 Posts: 63	that's interesting I had never heard of this Kelly system.