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Position Sizing And Kelly Ratio In Trading!

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Home Page > Finance > Position Sizing And Kelly Ratio In Trading!

Position Sizing And Kelly Ratio In Trading!

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Posted: Feb 11, 2010 |Comments: 0
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Risk and money management is the most important thing to learn in trading. Many traders make the mistake of ignoring proper risk and money management only to learn it later after getting their fingers burnt. First manage risk in the trade only then think about taking profit. If you learn this simple thing, you will always be on a safe ground in trading. As a trader, you will always have a finite amount of capital in your trading account. It can be $500. It can be $1000. And it can be even $1,000,000. Now, once it is gone, it is gone forever and you are done with your trading forever. So, learn risk and money management first before you learn anything else in trading.

The riskier you’re trading strategy, the more thought you need to give to your money management style. Otherwise, you can find yourself out of the market with a margin call in no time. Let’s say, you trade 100% of your account. You only need one losing trade to lose 100% of your account. Suppose, you divide your trading account into 10 equal parts. Now, you can have 10 losers before you are out of the market.

Now, if you divide your account into 100 equal parts, you need 100 losing trades to call it a day as a trader. This is idea behind the famous Kelly Criterion. You need to trade only a fraction of your trading account let’s say not more than 2% on each trade. You got the idea, good money management can keep you in the game so that eventually you start hitting winners.

But there is always a trade off. Remember the most important rule in finance, “no risk, no return.” In other words, the more return you want, the more risk you will have to take. But how much you should risk to get a decent reward? This is the most important thing for you. You don’t want to risk everything of course. So you don’t want to risk everthing on a single trade as long as there is some risk of losing your money. But at the same time you want a decent return to make in your trading otherwise there is no purpose of trading. So, how to go about it.

So what you need is a good money management system that tells you the position size for each trade that you should bet. Kelly Criterion emerged from the work done on signal noise issues in 1950s in the famous Bell Labs. Very soon, the mathematicians who had developed this formula saw its’ application in gambling and trading and in no time this formula took off with the traders.

In order to calculate the percentage of your trading account to put at risk, you need to know the percentage of your expected winning trades, ratio of winning trades to the losing trades as well as the return from the winning trades. These ratios are unique to each trading system. Once you have them, you can calculate the percentage of your trading account that you can risk with that trading system; Kelly %age=W-{(1-W)/R}.

W is the percentage of winning trades that the system makes over time. R is the average gain of the winning trade over the average loss of the losing trade. Many traders divide this percentage by 2 to be on a more safe side.

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Mr. Ahmad Hassam has done Masters from Harvard. Discover the top robots in the FRWC (Forex Robot World Cup). The winner will get $100,000 cash prize. Get this 40 page FREE FRWC Insider Report just now! Learn this powerful secret Fibonacci Retracement method FREE that pulls 500+ pips per trade.

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Article Tags:
position sizing in trading, kelly ratio, risk and money management

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Currency Tradingl
Dec 26, 2010

GPS Forex Robot That Made 321% NET PROFIT With Less Than 8% Drawdown Investor Password Access!

Here is your GPS Forex Robot Special Report and Proof… Please take full advantage of everything GPS Robot has to offer, and start reaping the benefits today! There are only 418 copies left. Trust me, it’s not a marketing hype, we’ll close the sales once the all copies are sold.

By:
Ahmad Hassaml

Finance>
Currency Tradingl
Dec 26, 2010

Combining Moving Averages With Candlestick Patterns For Buy/Sell Signals

Using the combination of two moving averages one slower and other faster like 10 days and 20 days moving averages with candlestick patterns can be powerful. Both confirm each other. Just like you can use bullish candlestick patterns in an uptrend to enter and exit a trade, in the same manner you can use bearish candlestick patterns in a downtrend to get entry and exit signals.

By:
Ahmad Hassaml
Financel
Dec 25, 2010

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Mr. Ahmad Hassam has done Masters from Harvard. Discover the top robots in the FRWC (Forex Robot World Cup). The winner will get $100,000 cash prize. Get this 40 page FREE FRWC Insider Report just now! Learn this powerful secret Fibonacci Retracement method FREE that pulls 500+ pips per trade.