Updated: February 5th, 2016 (02:10 AM) Views / Replies: 35,574 / 203 Created: March 19th, 2011 (02:00 PM) by RM99 Attachments: 16

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 The following 3 users say Thank You to cme4pif for this post:

Curtis
Hershey PA

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Peter2150

"If I understand all you do about this indicator, I might not use it to help me make money, but I don't understand what you are talking about, so I use it, and it does help me make money."

i like that quote i added my own twist to it

"If I understand all you do about Patterns, Volume and Indicator's, I might not use them to help me make points, but I don't understand what you are talking about, so I use them, and it does help me make points."
CRM

 Nothing so Impressive as Simplicity D.G. Watts

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Fat Tails
 One last recommendation here for those who are interested: Well known Gambler and Hedge Fund Manager Edward O.Thorp has written a book on "The Mathematics of Gambling". You may download your personal (legal) copy here. THE MATHEMATICS OF GAMBLING

Thanks for posting this. I really enjoyed skimming through it!

 The following user says Thank You to Steadfast Andy for this post:

Elite Member
australia

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 Fat Tails One last recommendation here for those who are interested: Well known Gambler and Hedge Fund Manager Edward O.Thorp has written a book on "The Mathematics of Gambling". You may download your personal (legal) copy here. THE MATHEMATICS OF GAMBLING

In the book which FT recommended, it is mentioned if you have the a 0.52 (p) probability of winning and the risk/reward is 1:1, the optimal bet size is calculated as p - (1- p).

If my risk/reward changes, how can I incorporate the r/r into the equation?

Elite Member
Ingatestone

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Posts: 133 since Feb 2012

Kelly criterion works for R:R.

(p*b-(1-p))/b

Where B is your R:R ratio. (so wins twice losses, b =2)

 Dovie'andi se tovya sagain.
 The following user says Thank You to Hotch for this post:

Elite Member
Northern Germany

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Hotch
 Kelly criterion works for R:R. (p*b-(1-p))/b Where B is your R:R ratio. (so wins twice losses, b =2)

Lets say it factors in RR, whether the Kelly criterion works at all is debatable. Interesting results if you assume b=100 and b=2 at constant p for arguments sake....the practical risk of ruin is rather high using kelly but for high RR the practical risk of ruin gets unacceptably high.

Vvhg

 Hic Rhodos, hic salta.

Last edited by vvhg; March 7th, 2012 at 10:14 PM.

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Hotch
 Kelly criterion works for R:R. (p*b-(1-p))/b Where B is your R:R ratio. (so wins twice losses, b =2)

@Hotch (and other math guys) perhaps you can help us here:

https://futures.io/psychology-money-management/15602-risk-ruin.html

Mike

Elite Member
Ingatestone

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vvhg
 Lets say it factors in RR, whether the Kelly criterion works at all is debatable. Interesting results if you assume b=100 and b=2 at constant p for arguments sake....the practical risk of ruin is rather high using kelly but for high RR the practical risk of ruin gets unacceptably high. Vvhg

It depends on your definition of "works", aka your personal goals, but mathematically it's still correct. The whole point of Kelly is that it is the maximum you should ever trade, because trading a larger size increases your risk without increasing your return (in the long run).

Of course, it's also assumes independent trades etc.

 Dovie'andi se tovya sagain.

Last edited by Hotch; March 8th, 2012 at 04:42 AM.
 The following user says Thank You to Hotch for this post:

Elite Member
Northern Germany

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Platform: NT
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Posts: 1,583 since Mar 2011

Hotch
 It depends on your definition of "works", aka your personal goals, but mathematically it's still correct. The whole point of Kelly is that it is the maximum you should ever trade, because trading a larger size increases your risk without increasing your return (in the long run). Of course, it's also assumes independent trades etc.

The main difficulty I have with kelly is the limitation to Bernoulli distributions, ie only two possible outcomes. This does not reflect the real world and results in too high bet sizes being suggested by Kelly.

Vvhg

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 Hic Rhodos, hic salta.

 March 17th, 2012, 12:59 PM #200 (permalink) Elite Member australia   Futures Experience: Beginner Platform: NinjaTrader Favorite Futures: -   Posts: 303 since Sep 2010 Thanks: 123 given, 137 received Hi guys, Is there a single factor/ratio which take into account of both Risk/Reward and probability?

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