The Key Ingredient to Success

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I came across some interesting information about the Kelly Formula that I think will be useful to those of you who struggle with the concept of position sizing. I will continue to include position sizing articles each month as it one of the most important aspects of any investment strategy, particularly the trading strategies that we follow. In my opinion, this is the most critical concept you need to tackle as a trader or investor.

 

Why is it critical? It is critical because the question of "How much should I allocate" determines your risk and your profit potential.

 

Some of you might find the Kelly criterion/strategy as a helpful guide to deciding what position size fits your investment goals.

 

In probability theory the Kelly criterion/strategy was used to maximize the long-term growth rate of repeated plays of a given gamble that has positive expected value. The formula specifies the percentage of the current bankroll (overall investment funds) to be bet (invested/traded) at each iteration of the game. In addition to the maximizing the profit, the Kelly strategy also includes the added benefit of having a zero risk of ruin; the formula will never allow for a loss of 100% of the bankroll on any bet (trade). An assumption of the formula is that currency and bets (trades) are infinitely divisible, which is actually satisfied for practical purposes if the bankroll is large enough.

 

Here is an article that should give you the basics of the position sizing strategy.

 

How Much Should I Stake – Kelly's Strategy

 

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High-Probability, Mean-Reversion Indicator

 

As for the High-Probability, Mean-Reversion Options Indicator, the only true short-term extreme is in XLU. 

 
High-Probability, Mean-Reversion Options Indicator