*I read this in a book and just pasting it here as it is* *can be of use for efficient use of capital* *very useful* ** *""" I was using something called the Kelly formula that Ralph Vince*
*had popularized. I found the Kelly formula in a little blackjack* *book, and Ralph and I started fooling around with it and it led to* *the whole thing of money management. Actually J.L. Kelly Jr. originally* *devised the formula for the flow of electrons through circuitry.* *But he said you could apply it to blackjack betting to measure risk/* *rewards, too, and then we applied it to trading. It’s very wild and it* *will exponentially increase the number of contracts you’re trading* *when you’re winning, so you see that we stepped up from 1 lot to 30* *lots rapidly. But when you lose money you’ve got to step back down.* *I use a variation of that in my own trading today.* * * Can you explain the specific formula? *Let’s put F as amount of capital to trade. The amount of capital* *equals the payoff ratio — that’s the risk/reward ratio — plus 1,* *divided by probability — the system accuracy — minus 1.* *So F =* *(payoff ratio *+ *1) */ *(probability *- *1)* *I did some tables on it. Let’s say your system is 40% correct and has* *a 2.5 risk/reward ratio, you’ll use 16% of your money. If your system* *is 63% correct with a 2.5 risk reward/ratio, you’ll use 55% of your* *money on every trade. So it varies by accuracy. It’s a matrix of the* *accuracy versus a risk/reward ratio.* ** ** *can we have a small afl for this*
