Widely used in the gambling community for sizing bets, the Kelly Strategy has proven to be an effective money-management tool for trading stocks.
Developing a viable trading strategy requires an effective money-management technique to maximize the long-term geometric wealth of a trading strategy. The strategy must have positive risk-adjusted expectancy for any money management to be additive. Kelly Criterion, a strategy has a positive expectancy will maximize the geometric growth in returns through the re-investment of profits or trade-to-trade compounding of returns. The Strategy defines a fixed fraction of capital to invest in each trade and is based on the
expectation (probability) of long-term capital growth.
Additional controls incorporated into the Kelly Calculator allow the user to vary the degrees of risk and return with built-in filters. Each strategy is automatically backtested to determine the best equity curve.
Trade Setup - Buy, Sell and Stop Limits and number of shares
Kelly % - Fixed percentage of capital
Capital Allocation - Fixed fraction of capital
Trade Quality - Positive trade percentage
Best Filter - The filter that produces the best geometric growth
Best Indicator - The Moving Average that produces the best gain
Transactions - The number of Buy’s
Trades - The number of completed trades
Win-Loss Ratio - The Average Wins divided by the Average Losses
Annualized ROI - Rate of return for a given period that is less than one year
Proceeds - Period sales less expenses
Trade Expectancy - Expected period return
Profit - The period profit
Holds - Transactions not sold
Stop Loss - Stop limit sales
Premium or Discount Purchase - Purchase above or below the pivot point price
Gain - The expected transaction gain
Initial Risk - The potential loss