# Help with Kelly Criterion Formula

Looking for assistance with using the formula for the Kelly Criterion. You can learn more about it here: Money Management Using The Kelly Criterion

I tried using the formula but I am not confident I performed the math correctly.

Please figure out the Kelly % using the following sample of values (pips lost/gained).

-30
-39
-31
-38
-67
39
60
35
110

FORMULA:
Kelly % = W – [(1 – W) / R]

Calculate “W”, the winning probability. To do this, divide the number of trades that returned a positive amount by your total number of trades.

Calculate “R,” the win/loss ratio. Do this by dividing the average gain of the positive trades by the average loss of the negative trades.

Thanks in advance,
Brutus

The Kelly Criterion only is applicable if you have a positive edge. Based on the numbers you provided, you do not have an edge. However, you should not apply Kelly unless you at least have a few hundred trades under your belt as it is very dependent on the accuracy of your win/loss ratio and winning probability.

Nonetheless, I will assist you in the calculating this figure.

Kelly % = W - [(1-W)/R]

Kelly % = .44 - [(1-.44)/1.19]

Kelly % = .44 - [.56/1.19]

Kelly % = .44 - .47

Kelly % = (-.03)

As this is a negative number, you can’t apply it to your trading strategy.

Hi … We have different values for R. Here is what I got. Not sure of the difference.

W = 4/9 = .44

R = ((39 + 60 + 35 + 110) / 4)) / (30 + 39 + 31 + 38 + 67) / 5)
= (244 / 4) / (205 / 5)
= 61 / 41
= 1.49

Kelly % = W - [(1-W)/R]

Kelly % = .44 - [(1-.44)/1.49]

Kelly % = .44 - [.56/1.49]

Kelly % = .44 - .38

Kelly % = (.06)

Point noted about the small sample.

regards,

I very well may have divided the wrong number there.

Also, note that this is under the assumption you are taking one trade at a time. You will have to take an even smaller size if you have simultaneous wagers going on at once.

[QUOTE=“mastergunner99;637619”]I very well may have divided the wrong number there. Also, note that this is under the assumption you are taking one trade at a time. You will have to take an even smaller size if you have simultaneous wagers going on at once. [/QUOTE]

So if i calculate a .06 Kelly %, then i should use it as the max for all trades, as in .06/X # of trades?

It depends on how you are placing the trades. I am a swing trader, so at times I may have 20 positions open at once, however, that figure varies and I can’t exactly assume how many trades I will be in.

Kelly Betters generally will bet a fraction of the Kelly Percentage, such as 1/4, 1/6/ or 1/10 Kelly.

The calculation can get pretty intricate when you get into a scenario where you are placing both simulantaneous and consecutive wagers.

I’d think to use it as a guideline for individual trades, then cap the risk to be no more than 25% to 30% across all active trades. … Pretty conservative.