Kelly-betting for FX trading

[zengrifter]

Originally Posted by Thunder

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.

Say what? zg

[zengrifter]

Originally Posted by blackjack avenger

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

Huh? Come again??

[Thunder]

Originally Posted by blackjack avenger

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

With all due respect, betting more conservatively won't overcome variance. What it will do is lower the risk of ruin at a cost to the growth of your bankroll.

[Thunder]

Originally Posted by zengrifter

Say what? zg

Which part didn't you understand?

[blackjack avenger]

Originally Posted by Thunder

With all due respect, betting more conservatively won't overcome variance. What it will do is lower the risk of ruin at a cost to the growth of your bankroll.

Agree "overcome variance" was to strong a term, perhaps manage is better. I also agree with your statement.
However,
Bank growth "Kelly" should not be the only consideration. You, yourself recommended 1/3 Kelly. In this example of high variance & uncertain edge (as Zengrifter keeps needing lol) betting conservatively can greatly increase the probability of growth, even if we overestimate our edge.

In bj Kelly long run numbers are staggering! As I am sure you know

[zengrifter]

Originally Posted by Thunder

Which part didn't you understand?

The part about how to estimate your +EV before you calc the Kelly bet size. zg

[Thunder]

ZG, he said he won 90% of his trades at =$10 and lost 10% at -$50. That's enough to calculate EV...

[zengrifter]

Originally Posted by Thunder

ZG, he said he won 90% of his trades at =$10 and lost 10% at -$50. That's enough to calculate EV...

It is? How big was the sampling? And what was the SD? zg

[Thunder]

You'll have to ask him. I would assume he has a decent sample size to be quoting those figures. You ask a very good question when you ask what the SD is. I don't think Kelly takes that into account when giving you the proper bet size and that can be important when utilizing your average loss to come up with a Kelly bet. If there is a way for Kelly to take into account the SD for losses, please let me know,

Case in point. Say when someone has an average loss of -10% per losing trade, are the losses all under -20% or are there some losses up to -60%? As I mentioned before, someone who has a small SD for their losses, is going to do much better than someone with a big SD. Personally if I knew the SD for my losses was quite big, I'd adjust my Kelly bet accordingly. Another thing that I've done is I've taken all my trades and experimented in Excel with how well I would have done had I invested a bigger % or smaller % of my bankroll per trade. After a large sample size, that can give you a good idea of what to invest or bet.

[BJ Warrior]

Originally Posted by matt21

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.

Hi Matt,

Don't be offended by comments, but it sounds to me like you're not a trader by profession. You didn't mention the sample size you use to determine EV, but I'm guessing it may not be large enough.

You probably are aware that many people do use Kelly in the markets, and that Ed Thorp has used it to make billions with his hedge fund - he practically invented the hedge fund concept. But you can believe that he also did a vast amount of research to determine his EV, or he wouldn't have made billions.

If you are interested in a serious answer to this question, I would put it to Don Schlesinger, who was a derivatives trader for Morgan Stanley, and now runs a training program for their traders. He's also a friend of Ed Thorp, has been an advisor to many BJ teams, and can probably give you the best answer to this question that you're going to get. You can reach him at his site, advantageplayer.com, or the GC page at BJ21, and possibly even their Free page, although I rarely check it.

Cheers,

BJ Warrior