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  #11  
Old June 2nd, 2011, 05:33 PM
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Default Lost in Translation?

Quote:
Originally Posted by matt21 View Post
Can you clarify what you mean by "3rd or 4th Kelly" and "4th through 8th Kelly"?

I think your other point is dead on - I consider myself to have one single BR that is used for AP and trading simultaneously.
3rd kelly = .33 kelly = 1/3 kelly
4th kelly = .25 kelly = 1/4 kelly

5th = 1/5 kelly
6th = 1/6 kelly
7th = 1/7 kelly
8th = 1/8 kelly

or is my terminology wrong?
  #12  
Old August 23rd, 2011, 11:46 AM
matt21 matt21 is offline
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bump.

I have a follow-up question here. I started this thread off with reference to the Kelly formula that states that the amount to be wagered on a bet or trade should be calculated by: Edge% / Odds. In this case odds refer to the amount of a winning payoff. Thus the higher the payoff (and thus the higher the variance) the lower the fraction of the BR that should be wagered.

What happens in the situation where the win result is less than a loss result? For example, a FX trading strategy that results mostly in winning trades of $10 and few losing trades of $50. The win rate is 90%, thus the edge per trade is $4 (90% x $10 + 10% x -$50) or 8% ($4/$50).

The win pay-off is equal to 0.2 of a loser - surely it would be wrong to divide 8% by 0.2, and then bet 40% of the bankroll?

It would be great if somebody could shed some light on this for me.
I am currently dealing with an FX strategy where I encounter this situation a lot, and am not sure how much to risk per trade using a fractional Kelly approach.
  #13  
Old August 23rd, 2011, 01:22 PM
DDutton DDutton is offline
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Quote:
Originally Posted by matt21 View Post
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.
How can one apply Kelly without a reasonable degree of confidence in what the +EV is?
  #14  
Old August 24th, 2011, 07:40 AM
matt21 matt21 is offline
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Quote:
Originally Posted by DDutton View Post
How can one apply Kelly without a reasonable degree of confidence in what the +EV is?
Hey DDutton, I am assuming that I know what the +EV is. I need to do that in order to ask the question. You are of course right in pointing out that with the FX markets the probabilities are not certain as they are in casino games.
  #15  
Old August 25th, 2011, 08:16 AM
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Default conservative

Bj bank 1/4 Kelly
Fx bank 1/6 Kelly, because of uncertainty
The above may balance the 2 investments.

How important is it to know exact advantage when being this conservative? I would think not much. It's one of the reasons we bet a fraction of Kelly, because of uncertainty.

Consider this:
An investment/game with an advantage of 1%.
Player A thinks its a .5% advantage
Player B thinks its a 2.25% advantage
They both bet 1/6 Kelly based on their perceived advantage.
Throw in a lot of variance. Both will be fine because they were conservative.

If player B had bet full Kelly, he would experience bank decline.

Also, being conservative allows one to have a low N0 because they don't have to resize bank down on losses as frequently.

Never be afraid of being conservative.
  #16  
Old August 25th, 2011, 09:18 AM
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Quote:
Originally Posted by blackjack avenger View Post
Bj bank 1/4 Kelly
Fx bank 1/6 Kelly, because of uncertainty
The above may balance the 2 investments.

How important is it to know exact advantage when being this conservative? I would think not much. It's one of the reasons we bet a fraction of Kelly, because of uncertainty.

Consider this:
An investment/game with an advantage of 1%.
Player A thinks its a .5% advantage
Player B thinks its a 2.25% advantage
They both bet 1/6 Kelly based on their perceived advantage.
Throw in a lot of variance. Both will be fine because they were conservative.

If player B had bet full Kelly, he would experience bank decline.

Also, being conservative allows one to have a low N0 because they don't have to resize bank down on losses as frequently.

Never be afraid of being conservative.
I'd go with 1/3 but this is just me. How many trades have you had so far to lead you to thinking that you win 90% of them and lose 10%?

Last edited by Thunder; August 25th, 2011 at 09:21 AM.
  #17  
Old August 25th, 2011, 02:32 PM
matt21 matt21 is offline
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Quote:
Originally Posted by Thunder View Post
I'd go with 1/3 but this is just me. How many trades have you had so far to lead you to thinking that you win 90% of them and lose 10%?
Hey Thunder. Again I wanted to proceed on the assumption that the win rate, and the EV, is known. What I was perplexed about is how to apply the Kelly formula - I have tried to explain my confusion in the post above.

Any thoughts?
  #18  
Old August 25th, 2011, 05:28 PM
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Well if you have $1000 let's say, in that scenario, you'd want to risk 40% of your bankroll so that the maximum loss you'd have is $400 while the max gain would be $80. This would be full Kelly. Your bankroll will grow at a rate of 1.82% per trade. The difference between this and having a trading system where you win 70% of the time and lose 30% of the time (but the loss amount equals the win amounts) is that in the 70/30 trading system, you don't have these huge drawdowns which essentially kill any growth in your bankroll.

This page might further help.. http://www.1stmillionat33.com/2006/0...-trading-size/

Last edited by Thunder; August 25th, 2011 at 05:30 PM.
  #19  
Old August 25th, 2011, 11:10 PM
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Default overcomimg variance

One should be able to overcome (edit MANAGE) variance in a tough game/trade if they bet conservatively. In Thunders $400 bet example, make it $100 or $40.

Last edited by blackjack avenger; August 26th, 2011 at 08:42 AM.
  #20  
Old August 26th, 2011, 01:28 AM
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Quote:
Originally Posted by blackjack avenger View Post
As one is less certain of their advantage they should be more conservative, as is the case with market trading.
But how certain can you be? zg
 

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