Another point one can raise when calculating a Kelly position size is
that how well a given strategy works. For example, one can optimize an
EMA crossover system that never looses on one particular instrument. If
the system never looses then the Kelly position size would be infinity
-- a sure thing. Easy to do, using large EMA time frames. Most know that
the chances of winning are small. This type of approach is not that great.
Another approach would be to use a very large data set -- multiple
instruments with a lot of history -- something that would require a few
months of running 24/7 to crunch out a Kelly number. Turns out a
realistic Kelly number is about 0.005. The turtles have also confirmed
that 0.005 is a pretty good number. Using small data sets one runs the
risk of over fitting. On the other hand, using large data sets one also
runs into the problem of combinatorial explosions--too many parameters
and strategies to evaluate.
On 09/25/2012 03:18 PM, nonlinear wrote:
You are right in that the Kelly Criterion is typically used to
calculate the optimum bet site (or in the case of trading, the
position size). However, in JBT it's used for a different purpose,
which is ranking the strategy with respect to a given set of
parameters. Think of it this way: suppose you have two strategies, A
and B. Let's say they make the same profit, and have the same max
drawdown. What's different is that the Kelly for strategy A is 30, and
for strategy B it is 60. Which one would you trade? The answer is
obvious: you want to trade strategy B, because the higher Kelly
indicates that the performance is more stable and predictable. In JBT,
the optimizer can be configured to use Kelly as a way to rank the
optimization parameters. So, Kelly in JBT is used as a strategy
performance metric (along with other metrics, such as Net Profit,
Profit Factor) during the strategy optimization.
On Tuesday, September 25, 2012 10:58:43 AM UTC-4, B wrote:
Hi I noticed that the kelly fraction is calculated.
But, I can't seem to find the code in JBooktrader that returns any
account information in order to use the kelly fraction to size my
positions.
Does that code exist?
And if not, what's the point then of calculating the kelly fraction?
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