I have a question regarding position sizing for trading the FX markets. If the moderators think it's more appropriate for this to be posted in another section, please do move the thread.

In my AP play I have been using the Kelly principle in determining how much to bet with various levels of edge and payoff. I have been using the formula of Edge%/Paypoff to determine the ratio of my BR that I should wager. Given warnings from established full-time gambling pros that AP's tend to overestimate their edge and to avoid the rollercoaster rides of full-Kelly betting I generally aim for half-Kelly bets.

As well as being an AP, I also speculate/trade in the FX markets, and am now trying to apply the Kelly theory to determine how much I should risk per trade. Many serious retail traders opt for risking no more than 1% of their BR per trade. I have one trading strategy which has been working quite well, in fact so well that I am heavily discounting the win rates in order to address the position size issue.

Assume therefore (conservatively) that there is a trading strategy - that creates 45% winners, 10% break-even and 45% losers. Losing trades result in a $1 loss. Winning trades result in a $1.30 gain [after all transaction costs]. This creates an EV of 13.5% per trade. This should be a very respectable edge for any AP. The other beauty here is that I have this edge every time that I have a setup that meets my requirements. When I dont have the setup then I dont trade. This is one major difference to my AP playing - I dont have any waiting bets in my FX trading. Though I might only have a half a dozen such opportunities per month.

Putting that into the Kelly formula we get 13.5%/1.3 = 10.38% implying that a full-size Kelly bet should be 10.38% of the BR. Half-Kelly would be 5.19% and quarter-Kelly would be 2.6%. At the moment I am only risking 1% per trade.

One argument that traders use for restricting themselves to 1% per trade is that it is psychologically difficult to see your BR decrease if you have several consecutive losing trades. However, I am quite used to psychologically deal with wins and losses from my AP experiences, so it seems that this reason shouldn't apply to me?

I am wondering whether anyone can comment as to whether it seems I should be increasing the amount I risk per trade? Is it wrong to apply the Kelly approach in this context? Also whether I have made any errors in my calculations?