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The Most Beautiful Formula in Trading

victorchan Updated 29 Mag  in #Money Management
The Kelly Criterion is the most well-known, simple and practical formula in the world the gambling and speculation. It determines the most optimal bet size according to the win-loss and reward-risk ratios of a betting system. The formula is given by:
K = W - (1 - W) / R
Where:
W = winning probability
R = reward-to-risk in each trade
For example, if your system risks one dollar to win every two dollar, and your hit rate is 40%, then you should bet:
K = 40% x 60%/2 = 12%
So, you should risk 12% of…
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Test Your Probabilistic Thinking

victorchan Updated 27 Mag  in #Money Management
Let's play a simple game to test your probabilistic thinking skill.
You start with $100 to play a betting game.
You are going to flip a coin three times.
For each flip, you bet a fixed percentage of your money in hand.
For a head, you double your bet.
For a tail, you lose your bet.
Here is an example:
Say, if you choose to bet a fixed 10% for each flip.
In your first flip, you have to bet $100 x 10% = $10.
If you win, you get $10 x 2 = $20.
And now have $100 + $20 = $120 in hand.
In your second…
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