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Ed Thorp, Jack Schwager, and the Kelly Criterion
Value Investing World
Excerpt from Jack Schwager’s interview with Ed Thorp in the book "Hedge Fund Market Wizards":
The Kelly criterion is the fraction of capital to wager to maximize compounded growth of capital. Even when there is an edge, beyond some threshold, larger bets will result in lower compounded return because of the adverse impact of volatility. The Kelly criterion defines this threshold. The Kelly criterion indicates that the fraction that should be wagered to maximize compounded return over the long run equals:
F = PW – (PL/W)
where
F = Kelly criterion fraction of capital to bet
W = Dollars won per dollar wagered (i.e., win size divided by loss size)
PW = Probability of winning
PL = Probability of losing
.................................................. .........
My comment:
For Binary Options trades, assuming NO SCAMS (LOL) by the site operators, I substituted the following figures in the Kelly criterion formula as a 'best case' scenario calculation for an 'above average' trader:
PW = 0.55
PL = 0.45
W = 0.80
Calculate F = - 0.0125
Note: The NEGATIVE VALUE for 'F' indicates that less than ZERO of your trading capital should be committed to this scenario. That is, you will eventually LOSE playing this game.
Actually, for the typical player, I think the Probability of Winning (PW) should be about 0.50 and the Probability of Losing (PL) should therefore also be 0.50. Using these likely more typical figures, the Kelly Criterion fraction: F = - 0.125, which is even more negative.
View the complete article at:
http://www.valueinvestingworld.com/2...and-kelly.html
Value Investing World
Excerpt from Jack Schwager’s interview with Ed Thorp in the book "Hedge Fund Market Wizards":
The Kelly criterion is the fraction of capital to wager to maximize compounded growth of capital. Even when there is an edge, beyond some threshold, larger bets will result in lower compounded return because of the adverse impact of volatility. The Kelly criterion defines this threshold. The Kelly criterion indicates that the fraction that should be wagered to maximize compounded return over the long run equals:
F = PW – (PL/W)
where
F = Kelly criterion fraction of capital to bet
W = Dollars won per dollar wagered (i.e., win size divided by loss size)
PW = Probability of winning
PL = Probability of losing
.................................................. .........
My comment:
For Binary Options trades, assuming NO SCAMS (LOL) by the site operators, I substituted the following figures in the Kelly criterion formula as a 'best case' scenario calculation for an 'above average' trader:
PW = 0.55
PL = 0.45
W = 0.80
Calculate F = - 0.0125
Note: The NEGATIVE VALUE for 'F' indicates that less than ZERO of your trading capital should be committed to this scenario. That is, you will eventually LOSE playing this game.
Actually, for the typical player, I think the Probability of Winning (PW) should be about 0.50 and the Probability of Losing (PL) should therefore also be 0.50. Using these likely more typical figures, the Kelly Criterion fraction: F = - 0.125, which is even more negative.
View the complete article at:
http://www.valueinvestingworld.com/2...and-kelly.html