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Essay: Trading system probability

Quoting silverpike
No, it doesn't. The Kelly value is a formula-derived number, and it tells the trader what percentage of the total capital to risk on each trade. This number is determined from the risk/reward and win rates.

Choosing percentages less than this value will work, but the system will not make money as fast as it could (in theory). Using percentages larger than this means the trader may end up in ruin (total loss of capital). The Kelly value is chosen to minimize a certain "risk of ruin". I don't know offhand what criteria the online calculator uses, but it's probably appropriate.
That's what I thought. I have however noticed that the kelly formula can be amended to give a higher percentage if the negative volatility is low. I have only anectotal empirical proof for that right now, but it seems logical enough.

Say for instance you have a:
50 pip stoploss, max drowdown 100 pips, average loss 10 pips,
that should yield a different percentage than say:
100 pip stoploss, drowdown 300, average loss 20,
even if the expectancy is the same.
Quoting silverpike
Expectancy, as far as I know, has no specific meaning. They can be used for relative comparison. Values greater than zero will have positive returns, and negative values means it's a loser. Nothing beyond that.
Thanks. Definitly a handy tool.
Hi,

Thanks silverpike for your excellent contribution.

I have a doubt about how you calculate StdDev in your excel
file in post #3. You are adding 0's, I think in this way
you are introducing "phantom trades" that affect SD calculus.
I have attached your excel file modified trying to avoid 0's.

What do you think about this?

Best regards.
Attached File(s)
File Type: zip firebirdEA_v1.1.zip   44 KB | 428 downloads
Quoting smartman
I have a doubt about how you calculate StdDev in your excel
file in post #3. You are adding 0's, I think in this way
you are introducing "phantom trades" that affect SD calculus.
I have attached your excel file modified trying to avoid 0's.

What do you think about this?
I wondered about this when I was writing the Excel sheet. I tried reading the documentation on the STDDEV function, and found no mention of zero entries, nor blank entries. It is possible that zeroes make the STDDEV calculation inaccurate. I can't remember what I decided when I wrote this stuff. I probably figured I would look at it later.
Any feedback on individual account progress or improvements on this EA (new settings or updates)?
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  • Last Post: Sep 1, 2022 8:02pm Sep 1, 2022 8:02pm
Surprisingly, this topic is from 2006, but is still relevant.
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