It is worth adding that the above calculations of the Kelly criterion and Kelly expected growth rate are really only appropriate for trading strategies that use no exit other than a fixed stop loss and profit target.
What is Expectancy? 13 replies
System Expectancy - Monte Carlo Simulation 5 replies
Expectancy question for experienced traders 2 replies
Random Market vs Set Expectancy 8 replies
Expectancy is always zero 41 replies
Disliked(thinking out loud) If someone filters his setups why the filters aren't already part of the system's rules?Ignored
Disliked{quote} It's just a joke playfully masquerading as a wisdom. No math involved. Here is another one of the same sort: better to be rich and healthy than poor and sick. .Ignored
DislikedKelly is about Money Management. With the high risk of repeating myself this is OFF-TOPIC. In pseudo-maths, "1+4%" is not a correct notation. If you want to educate people give the full kelly equation, not the simplified version for binary outcome you copied and pasted from Wikipedia. I know it is much more complicated and requires pseudo-maths, like numerically solving the first positive root of a high degree polynomial of logarithms. Now I'm fed up feeding the troll.Ignored
(Average(returns)^2 * trades) / (2*Variance(returns))
DislikedBecause I do my homework even, and especially, when I'm told it is useless... I ran two Monte-Carlo simulations of two Bernoulli trials. In these two games either you lose 1 or you win R. Probability of winning is P. The first one simulates a system with 70% win rate and a R:R of 1. Its expectancy is 0.4. The second one simulates a system with only 28% win rate but a R:R of 4. Its expectancy is 0.4 as well. Apple to apple! In the first 2 pictures below, 100 trades are simulated 1000 times each. Because drawing 1000 curves doesn't look good, the...Ignored
QuoteDisliked# trades......profit factor needed
10............4.00
20............2.50
30............2.00
40............1.75
60............1.50
QuoteDislikedSo it seems you could summarize by saying that win%, R:R and trade count are all important factors that relate to consistency of returns. Are there any others?
DislikedI stopped the simulation after only 12 trials so the difference is obvious. The first system, with a win rate of 70% and betting 40% of its equity reaches the finish line with a ridiculous ~$4000 at best. The system with 28% win rate betting 10% reaches a 8 figure balance! {image}Ignored
DislikedKeep in mind that when you increase the trading frequency your trades become more and more linked to the market movement of a short period of time: your trades become correlated. But his simulations as well as the ones I've posted are based on Bernouilli trials which assume independence. Of course if you can trade your system more often with the same reliability while keeping the independence... Why do you believe I'm trying to build a set of (potentially) strongly trending but non-correlated pairsIgnored