Trade sizing - Kelly Criterion
Maximize rate of growth should bet a constant fraction of cash on hand. Bet only if an advantage can be seen. Kelly generates high compounded returns without the risk of going bust.
Principle working: law of large numbers; average of results will be (close) to expected value. Stay in the game long enough to make this work.
BET = (2 * probability) - 1
example: A:60/B:40 prob - bet on A
$25 start
20% = $5
win: bet $6 = 20% of $30
lose: bet $4 = 20% of $20
Edward Thorpe thinks 50% of Kelly formula is better, original is too high
Example in Excel Investing/Applying Kelly Criterion in a Trading Strategy.xlsx
Web Links
- https://www.aussportsbetting.com/tools/online-calculators/kelly-criterion-calculator/
- https://corporatefinanceinstitute.com/resources/data-science/kelly-criterion/
- https://en.wikipedia.org/wiki/Kelly_criterion
- https://www.investopedia.com/articles/trading/04/091504.asp
- https://blogs.cfainstitute.org/investor/2018/06/14/the-kelly-criterion-you-dont-know-the-half-of-it/
