I just recently came across the Kelly Criterion which is a formula for maximizing bets knowing the odds so the factors might look something like this:
Where the Kelly Criterion is:
k = (bp−q)/b
Where:
The general rule of thumb is to not risk more than 1% of your account on any one trade. There are many factors that go into this rule of thumb working out pretty well. I've already figured out the formulas for determine this number more precisely which takes a bunch of statistical data gathering but it generally comes down to around that, for example it might end up being 1.68% or some such number as the maximum you should bet based on not hitting your account limit on some bad trades with a given leveraged account.
Having figured that out I then came across the Kelly Criterion and wondered if it would be as simple as getting that number and dividing it by the leverage for the maximum bet as a modified Kelly Criterion calculation.
E.g. using the 41.67% in the example above 41.67% / leverage of 100 would be 0.4167% . This seems too small to me, i.e., it doesn't pass the sniff test for me and I suspect that it is not that simple and that's why I am here, I'm hoping someone far better than me at math might know how to combine the two factors.
My idea in the end is to make my other calculation and the result of this modified Kelly Criterion and use the smallest of the two numbers for my risk amount.
I.e.: Risk = min(My risk calcs, modified Kelly Criterion calc)
If someone out there has a solution for this, please do let me know or if I'm trying to do something that you can't do, I can take it, just tell me straight up.
Thanks,
Reg
| Kelly Criterion | |
| Winning % | 65.00% |
| Losing % | 35.00% |
| Odds | 1.50 |
| % to Bet | 41.67% |
Where the Kelly Criterion is:
k = (bp−q)/b
Where:
- k is the fraction of the current bankroll to wager;
- b is the odds received on the bet (the payout on a $1 bet, not including the original stake);
- p is the probability of winning;
- q is the probability of losing, which is 1−p.
The general rule of thumb is to not risk more than 1% of your account on any one trade. There are many factors that go into this rule of thumb working out pretty well. I've already figured out the formulas for determine this number more precisely which takes a bunch of statistical data gathering but it generally comes down to around that, for example it might end up being 1.68% or some such number as the maximum you should bet based on not hitting your account limit on some bad trades with a given leveraged account.
Having figured that out I then came across the Kelly Criterion and wondered if it would be as simple as getting that number and dividing it by the leverage for the maximum bet as a modified Kelly Criterion calculation.
E.g. using the 41.67% in the example above 41.67% / leverage of 100 would be 0.4167% . This seems too small to me, i.e., it doesn't pass the sniff test for me and I suspect that it is not that simple and that's why I am here, I'm hoping someone far better than me at math might know how to combine the two factors.
My idea in the end is to make my other calculation and the result of this modified Kelly Criterion and use the smallest of the two numbers for my risk amount.
I.e.: Risk = min(My risk calcs, modified Kelly Criterion calc)
If someone out there has a solution for this, please do let me know or if I'm trying to do something that you can't do, I can take it, just tell me straight up.
Thanks,
Reg
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