Wednesday, April 10, 2013

18% down...

I spent a few days mulling over returning to a 33% Kelly money management system. My Monte Carlo simulations make it look so alluring, even though I can expect significant drawdown. Yesterday I decided to return to trading at 33% Kelly for my next two trades, both of which lost.
I lost around 18% of my equity, according to MT4. It was a huge hit, although I'm still in profit since ineption.
What was my emotional reaction? My reaction to the loss itself was quite muted. However, I can feel a loss in confidence when contemplating the next setup at the same risk level.
I would love to continue this sort of money management style, but intuitively I feel I'm setting myself up for a fall, probably due to unforeseen, unmanaged risk.
Well, the good news is that trading at 1-2% makes it alot easier to manage simultaneous trades.
I believe my risk profile is very high. I just need to find the right balance.


  1. I suggest that you trade differently with the Kelly formula. - First of all you test it properly (if you have not already done so) and calculate the correct position sizing based on something like Kelly-formula-position-sizing - 50% (or what ever suits you and should still enable your survival). This will still be much higher then a standard 1 or 2% risk.

    After that you determine an amount of money which you are prepared to lose in case of a total loss. Let's say that is 5000$. You fund your trading account with exactly this amount. Mentally you treat this from the start as a loss. Then you start trading with it for a year or so and no matter how it goes you continue trading .... and hopefully either enjoy tremendous gains or suffer a total loss.

    1. This sounds tempting but I think I need to stay away from Kelly money management altogether and just forget about it. As long as I even contemplate the possibility of using the Kelly formula, there's the risk that I'll use it on my main account during a moment of weakness / impatience.


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