I only opened two trades last week on the USDCHF. Both trades lost due to choppy conditions, and because of excess risk, my profit for this year took a significant hit.
USDCHF
I spotted some low volatility on the USDCHF daily chart on Monday's close, and prepared my orders for the break of Monday's high and low on Tuesday morning.
Monday's low and high were both broken, triggering a short and a long respectively. However, in each case, price retreated before reaching their profit target. The market chose to be choppy that day and both trades were shaken out, as illustrated on the H1 chart below.
Because I used 33% Kelly money management, my exposure to both trades was around 18% of my equity. I lost over half of my profit for this financial year. While I understand the Kelly criterion, when I try to explain how I intentionally risked so much to other people, I felt stupid. This is just one of those psychological factors. Can you 100% defend the way you trade? If not, this is a potential source of weakness that can shake your game.
Anyway, I've reduced my risk to 1-2% per trade. Now I can sleep a little more easy. :)
Anyway, I've reduced my risk to 1-2% per trade. Now I can sleep a little more easy. :)
With regards to Kelly criterion, you may want to read Ed Thorp's interview in the book "Hedge Fund Market Wizards". He discussed why Kelly criterion is too risky in trading, because the probability of winning is unknown, and at best, can only be estimated.
ReplyDeleteHi anon. I've got that book lying around somewhere, and will take a look at that interview. But I agree with your point. The market isn't like a gambling table where the probabilities and payouts are fixed. It's an organic and ever-evolving beast that needs to be respected.
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