So who was Kelly? How did he get a money-management formula named after him? John L. Kelly presented his idea as a system for betting on fixed horse races. In Kelly's analysis, the smart gambler should be interested in compound return on capital. The gambler's optimal policy is to maximize the expected logarithm of wealth. Though an aggressive policy, this offers important downside protection. Since log(0) is negative infinity, the ideal Kelly gambler never accepts even a small risk of losing everything.
He came with the famous Kelly % = W - (1-W)/R where:
* Kelly % = percentage of capital to be put into a single trade
* W = Historical winning percentage of a trading system
* R = Historical Average Win/Loss ratio
It is a formula for calculating how much to bet. It assumes that your objective is long term capital growth. The handicapper's choice of money management strategy is similar to the stock market choice between growth stocks and income stocks. Growth stocks tend to be more volatile, but in the long term return more profit. That is because the profits from growth stocks are reinvested rather than skimmed off.
The formula has come to be simply known as the Kelly formula and it was great inspiration to great trend traders and systems traders. They were inspired directly by Bell Labs research to develop systems centered around determining the optimal bet size or known as money management. Every reinvestment is a calculated risk. Therefore, income stocks tend to fluctuate in value less, but also return less profit in the long term. Kelly betting is for capital growth by reinvests the profits.
Paijo Lopez Go to http://daily20pip.com to get daily free forex signal and learn more about the D20P Simple yet Profitable Forex system. |
No comments:
Post a Comment