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Tuesday, November 25, 2008

Money Management: Strategies: Kellys S

"If a gambler places bets on the input symbol to a communication channel and bets his money in the same proportion each time a particular symbol is received, his capital will grow (or shrink) exponentially. If the odds are consistent with the probabilities of occurrence of the transmitted symbols (i.e., equal to their reciprocals), the maximum value of this exponential rate of growth will be equal to the rate of transmission of information. If the odds are not fair, i.e., not consistent with the transmitted symbol probabilities but consistent with some other set of probabilities, the maximum exponential rate of growth will be larger than it would have been with no channel by an amount equal to the rate of transmission of information" - Summary of Original Bell Labs Paper, Kelly, J. L., Jr. A New Interpretation of Information Rate, Bell System Technical Journal, pp.917-926, July, 1956.

As I mentioned the other day here on the blog? YouTube contacted me, after blocking one of my money management videos. I was under the impression that I was allowed to use under 30 seconds of any song, under the 'fair use' clause. Well, YouTube disagrees. I did not store those videos anywhere else; such as at Google Video, Metacafe, etc. Therefore, I will re-do these very important videos. At the same time? I get to improve the video quality. If you have not seen them yet? This is the most important series of videos that I ever made.

Larry Williams used a very radical and very aggressive money management strategy to set the current Robbins Cup World record in 1987 for Futures trading.

Again, the advantage is that when you're doing well, the formula will automatically scale up your position size so that your reward becomes higher. When you start having losses, it will scale back your position size.

Unfortunately, as Larry himself will tell you, Kellys has a lot of drawbacks . . . namely . . . drawdown. If your risk reward ratio is not straight on? You get nailed. Hard. So how do I use the advantages of Kellys, but mitigate the risks when trading in the Forex, Commodity Futures, Day Trading, or just in the Stock Market in general?

What follows is a description of my current money management strategy. We discuss that in this vlog entry ...

(Video Included. If you're seeing this from Email subscription? Click on the Title Link in the Email to View the Video ...)

It works best with 12 month accurate systems (around 80% +), and a risk reward ratio of around 1 risk to 2 reward. My numbers (the 12 month number fluctuates) work out to . . % of Capital = (12 mos number% (1- 12 mos accuracy) / 70 ) / IF-THEN SUBSET.

This is going to be one insane week around here. Work, appointments, family responsibilities, that sort of thing.

But as far as investing and trading? I'm looking at the DXZ8 really hard right now, and looking to see if this is a minor dip before the trend continues, or if we have a trend reversal ...

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Note: This is not an investment or trading recommendation. The losses in trading can be very real, and depending on the investment vehicle, can exceed your initial investment. I am not a licensed trading or investment adviser, or financial planner. But I do have 12 years of experience in trading and investing in these markets. The Challenge accounts are run for the education of other traders who should make their own decisions based off their own research, and tolerance for risk.

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