One of the best ways to increase the level of rationality in the management of capital is considered to be the Kelly formula. Perennial question of how to calculate the amount of risk justified with respect to each new deal is haunted by many market participants. After all, too much money transactions often lead to a complete loss of the deposit.
This brings up a very small position, risking a minimum of means, also not justified - such tactics are not able to provide the trader a decent monthly income. However, between the maximum and minimum values of transactions is an area, the potential for capital growth which is being implemented at the highest level.
Paradoxical as it sounds, the world-famous original formula was invented to prevent accidental interference on phone lines in 1956. Then the scientist Kelly has developed a method to increase the flow of data in the process of reducing the accidental loss of information data.
Today this method is actively used by traders to operate in the financial markets. To calculate the optimal percent expedient risk is necessary to have the following data of the trading system, which is used in the process to:
W% - the percentage of winning trades;
W - average gain value;
L - size of the average loss.
Calculated as the main indicator of Kelly formula as follows:
The optimum percentage of possible risk = W% - ((1-W%) / (W / L)).
The practical examples. In the presence of yielding 50% win percentage of profitable positions equal to the value of 0.5. The average profit of the system's data is 7, and the average Loss - 3. Based on this W% = 0,5, W = 7, and L = 3.
Optimal risk percentage is 0.5 - ((1-0.5) / (7/3))
= 0.5 - (0.5 / 2.33)
= 0,5-0,21
= 0.29
Using this method, we were able to calculate the maximum amount of risk, which in this case was 29%. The main drawback of the method is Kelly drawdown. When using a high number of winning trades in continuous operation in the market can suddenly begin to suffer losses of 10 to 15 times in a row. That is why in the process of using the formula recommended never risk more than 25% of the deposit when drawdowns achieved the 25% value.
The use of the Kelly is a great tool in the hands of professional traders who want to receive the most out of the work on Forex . Experienced market participants, based on the current realities, it is recommended to use a value of 80% of the final index formula.
By modern standards, the above example is obsolete. Today, with 50% of the index is recommended to reduce the rate to the maximum recommended level of 25% and 80% find it, which is 20%. At the conclusion of more than one transaction obtained by the formula rate is divided by the number of them. If the number of transactions is equal to four, the calculation is as follows: 20% / 4 - the optimal size of a deal of 4 equal to 5% of the total deposit.