[SunnyJHarris]

I have a chart of the results ... I can't reveal the calculations, as, unlike Vince, mine is proprietary and I offer it to my students without revealing the code. My code uses the actual trade values and calculates the number of shares to put on for the next trade. To use the code you must have a minimum of 30 actual trades to put into the spreadhseet.
Sunny

Originally Posted by silentdud »

I can see a few problems with optimal-f from just a quick look at it though. It is guilty of the same problem that problem that the Kelly criterion is, i.e. not looking at the instances around the mean, only at the estimated values. Does the modified version fix this?? Do you have any links describing its calculation?

As far as I can tell it is only useful for ball parking and quick, on the spot math.

I looked at this for information on calculating the original "optimal" f.
Contango: Optimal f

Thank you.
Silentdud

[pashag81]

I used Kelly for strategy which trades by single instrument, I see that perfomance became better only on 10%-20%. is it normal?, or it should gives better upgrates for perfomance?

[silentdud]

Originally Posted by pashag81 »

I used Kelly for strategy which trades by single instrument, I see that perfomance became better only on 10%-20%. is it normal?, or it should gives better upgrates for perfomance?

It's not really improving your returns, i.e. your immediate ones, it should be improving them over time, but the idea is the same as controlling and making sure your capital reserve isnt depleted so much that you can't regrow it.
You may want to look at the Safety first criteria. If you are looking for simple management that could be up your alley. It depends on how much money that you are managing.

[eqsys]

The problem with using the Kelly formula, or any other formula that considers closed trades is that there is no consideration of what happens DURING the trade - in other words, the drawdown that can and does occur while waiting for the system to close out of the position.

Not only is there the drawdown that happens during one trade, but there is the accumulated drawdown from a series of trades. Even if your system produced 100% profitable trades on a closed trade basis, if the intra-trade drawdown is large, it is going to cause you much grief and it is likely you will bail on your trade and system well before your system pulls you out.

I use tradestation to backtest my systems, and always look at the Strategy Performance Report. Then I look at the Max Drawdown Intra-day Peak to Valley calculation.

I then allocate 10x this number to trade 1 futures contract. This way, when this drawdown occurs again (and it WILL) I will only be down 10% in my account equity - a number I have found I can handle without getting extremely upset. If your account is small, you might be able to handle up to 30% drawdown before you panic, but as your account size increases, it becomes increasingly more difficult to take drawdown of this magnitude.

If you get extremely upset, and everyone has a different point where this occurs - but it does and will occur, you will 1) exit your trade at the wrong time, 2) be unable to sleep, 3) stop trading your system, or 4) some other irrational behavior. Have you ever just said, "I can't take this anymore", and just sold everything?

If you are overleveraged and trading futures, you may just run out of equity and get a margin call - and that's the end of your trading either permanently or temporarily.

The trouble with a system that shows a 2:1 profit factor, that is, winning trades make double the losing trades, but you have fewer than 50% winning trades, is that you have a lot of losing trades - tough to handle emotionally. Also, the winning trades come from a subset of the whole universe of closed trades, and this might mean that the winners were based on some unusual price behavior not llikely to occur in the future.

The ideal system has maximum gains and minimum drawdown, and ideally, seldom has a losing day.

The simplest example of a system that is almost impossible to trade, yet looks great on paper (compute the Kelly formula) , is a buy and hold. It may have 1 profitable trade,and no losing trades. However, the intra-day drawdown peak to valley might be HUGE. That's what will bury you as a trader.

[SunnyJHarris]

As Mammy Yokum said: "Truer words were never spoke."
The larger your trade size and the higher the account value, the more likely you are to sabotage your system.

Originally Posted by eqsys »

The problem with using the Kelly formula, or any other formula that considers closed trades is that there is no consideration of what happens DURING the trade - in other words, the drawdown that can and does occur while waiting for the system to close out of the position.

Not only is there the drawdown that happens during one trade, but there is the accumulated drawdown from a series of trades. Even if your system produced 100% profitable trades on a closed trade basis, if the intra-trade drawdown is large, it is going to cause you much grief and it is likely you will bail on your trade and system well before your system pulls you out.

I use tradestation to backtest my systems, and always look at the Strategy Performance Report. Then I look at the Max Drawdown Intra-day Peak to Valley calculation.

I then allocate 10x this number to trade 1 futures contract. This way, when this drawdown occurs again (and it WILL) I will only be down 10% in my account equity - a number I have found I can handle without getting extremely upset. If your account is small, you might be able to handle up to 30% drawdown before you panic, but as your account size increases, it becomes increasingly more difficult to take drawdown of this magnitude.

If you get extremely upset, and everyone has a different point where this occurs - but it does and will occur, you will 1) exit your trade at the wrong time, 2) be unable to sleep, 3) stop trading your system, or 4) some other irrational behavior. Have you ever just said, "I can't take this anymore", and just sold everything?

If you are overleveraged and trading futures, you may just run out of equity and get a margin call - and that's the end of your trading either permanently or temporarily.

The trouble with a system that shows a 2:1 profit factor, that is, winning trades make double the losing trades, but you have fewer than 50% winning trades, is that you have a lot of losing trades - tough to handle emotionally. Also, the winning trades come from a subset of the whole universe of closed trades, and this might mean that the winners were based on some unusual price behavior not llikely to occur in the future.

The ideal system has maximum gains and minimum drawdown, and ideally, seldom has a losing day.

The simplest example of a system that is almost impossible to trade, yet looks great on paper (compute the Kelly formula) , is a buy and hold. It may have 1 profitable trade,and no losing trades. However, the intra-day drawdown peak to valley might be HUGE. That's what will bury you as a trader.

[silentdud]

Edit: sunnyjharris just said exactly what i was going to lol

[gianno]

You play with Kelly or Optimal-f, you play with fire.