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  • Kelly Criterion

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    The document discusses concepts related to money management and expectancy in trading. It provides formulas for calculating expectancy and optimal position size. Specifically, it shows how to use probability of winning, average win, probability of losing, and average loss to calculate expectancy. It also shows how the Kelly criterion can be used to determine optimal position size to maximize growth while managing risk. Position size and probability of winning or losing are shown to impact the probability of a trading account being depleted.

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    The document discusses concepts related to money management and expectancy in trading. It provides formulas for calculating expectancy and optimal position size. Specifically, it shows how to use probability of winning, average win, probability of losing, and average loss to calculate expectancy. It also shows how the Kelly criterion can be used to determine optimal position size to maximize growth while managing risk. Position size and probability of winning or losing are shown to impact the probability of a trading account being depleted.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as xlsx, pdf, or txt
    16 views2 pages

    Kelly Criterion

    Uploaded by

    bumpin01
    The document discusses concepts related to money management and expectancy in trading. It provides formulas for calculating expectancy and optimal position size. Specifically, it shows how to use probability of winning, average win, probability of losing, and average loss to calculate expectancy. It also shows how the Kelly criterion can be used to determine optimal position size to maximize growth while managing risk. Position size and probability of winning or losing are shown to impact the probability of a trading account being depleted.

    Copyright:

    Attribution Non-Commercial (BY-NC)
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as xlsx, pdf, or txt
    of 2

    The Key to Getting Rich: Expectancy & Money Management

    Probability
    Expectency
    Probability of Winning
    Probability of Losing
    Average Win
    Average Loss

    60%
    40%
    0.8%
    1.0%

    Expectancy = (PW * AW) - (PL * AL)


    Expetency
    Trading
    No Trades Per Year
    Capital
    Risk
    Return
    Return on Equity
    Optimal Position Size
    Kell Criterion = PW -[(1-PW)/(PW/PL)]
    Kell Criterion (Optimal Position Size)

    0.05%

    100
    $100,000
    33%
    $1,666.67
    2%

    33.33%

    No Trades
    1
    2
    3
    4
    5
    6
    7
    8

    Probability
    Losing
    49.0%
    46.5%
    44.0%
    41.5%
    39.0%
    36.5%
    34.0%
    31.5%
    29.0%

    Probability
    Winning
    Losing
    60.0%
    40.0%
    36.0%
    16.0%
    21.6%
    6.4%
    13.0%
    2.6%
    7.8%
    1.0%
    4.7%
    0.4%
    2.8%
    0.2%
    1.7%
    0.1%

    Probability
    Winning
    51.0%
    53.5%
    56.0%
    58.5%
    61.0%
    63.5%
    66.0%
    68.5%
    71.0%

    Kelly
    33.3%
    13.1%
    21.4%
    29.1%
    36.1%
    42.5%
    48.5%
    54.0%
    59.2%

    Prob Blow Up
    12%
    0%
    2%
    5%
    7%
    9%
    11%
    12%
    12%

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