The Kelly criterion is for advanced traders only.

Disclaimer

It looks at the results of your previous similar trades and gives you a so-called Kelly percentage number. This number tells you what percentage of your trading account you could risk on this kind of trade at the current time. Calculating the Kelly criterion is relatively simple and relies on two basic components: your trading strategy's win percentage probability and its win to loss ratio. The win percentage probability is the probability that a trade will have a positive return.

The win to loss ratio is equal to your total trading profits divided by your total trading losses. These will help you arrive at a number called the Kelly percentage. This gives you a guide to what percentage of your trading account is the maximum amount you should risk on any given trade. Lets say that you have been trading with a system that has given you 40 winning trades and 60 losing trades.

However, it may if you are trading or investing long term or help you diversify your investment portfolio and allocate a proportion of your trading equity to certain assets.

What Is the "Kelly Criterion" in Forex? - Orbex Forex Trading Blog

It is important not to over-rely on the Kelly Criterion as your sole method of judging position sizes and risk tolerance. As with all forms of money management techniques and calculations, you should always work out — and stick to — a maximum risk level for any trade, regardless of what formulas like the Kelly criterion tell you.

Traders all take a different view on what this maximum standard should be, based on their personal trading strategies and risk tolerance. The most important thing to bear in mind when setting your maximum risk level is how any losses will impact your trading account and how these losses will affect your trading psychology, etc.

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For instance, if you have a very high risk tolerance you are likely to risk a greater percentage of your account balance in line with the Kelly percentage. This will result in much higher returns when your trading is successful but much more damaging hits to your account balance when it is not.

If you have a very low risk tolerance you should keep your risk on each trade extremely low, despite what the Kelly percentage suggests.

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This will result in much smaller profits but also smaller hits to your account balance when trades go wrong. The more trades you base your calculations on, the more accurate your Kelly percentage is going to be. To start, you should take at least trades into account to make sure that your strategy is profitable.

To use the Kelly criterion, start by logging all your trades in a trading journal, detailing the size, direction, profit target and outcome of each position. Only once you have around similar trades do you have enough data to base your calculations on. Also, keep an eye on market conditions. Markets move through various cycles and the same trade will have a very different outcome depending on whether it is placed during volatile, ranging or trending conditions.

If prices are currently trending, for example, and you want to work out how much you can afford to risk on a new position, only include in the Kelly criterion calculation those similar trades that were also taken during trending conditions. This will help to keep your results consistent. Tradimo helps people to actively take control of their financial future by teaching them how to trade, invest and manage their personal finance. Risk warning: Trading in financial instruments carries a high level of risk to your capital with the possibility of losing more than your initial investment.

Trading in financial instruments may not be suitable for all investors, and is only intended for people over You will learn why and when you should apply either of the two! With this last method I show you will solve that problem once and for all! Same goes for all the techniques in this strategies in this course!

A Kelly Strategy Calculator

If you are just beginning your trading career, then this course will protect you from hundreds if not thousands of lost money. It will also save you time and effort researching all of this information on your own. If you are a seasoned trader, a comprehensive Money Management arsenal is what can really take your trading to the next level. Take this course now and start applying these techniques in YOUR trading today! Previous Article.

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