Determining Investment Ratio (1) - Based on Kelly Formula

------------------------------------------------------------------------------------------------------------------

https://accounts.binance.com/register?ref=21391362 <- Get Discount on Binance Futures Fees With Referral Code

Referral Code : 21391362

------------------------------------------------------------------------------------------------------------------

 

When investing, many of you may have heard that if you invest all of your money, there is a high probability that you will ultimately go bankrupt, even if your winning rate is high. The reason is because of the compound interest effect. If a profit occurs when the entire amount is invested, the profit is large due to the compound interest effect, but the loss is also large.

Therefore, it is very important to find the optimal investment ratio and invest in order to avoid significant loss of investment money. There are many investment (betting) methods. Let's take a look at the widely known Kelly formula.

If you look for information on the optimal investment ratio, you will often find the Kelly formula, but if you blindly use the formula as is, you will not get the correct value. The reason is that in games and casinos, the winning rate can be predicted to some extent and there is accurate information about loss/profit. But stocks and coins are a bit different. It is not easy to convert the win rate for RBI into an exact percentage, and the P&L ratio is also not accurate because positions can be liquidated mid-term depending on intraday conditions.

The following is the Kelly equation and an explanation of the corresponding values. Let’s find the investment ratio by giving an appropriate value.

 

r: expected value, f: investment ratio
p: win, q: lose
b: profit ratio, a: loss ratio

 

As explained above, in stocks, coins, etc., it is not easy to calculate the win rate and profit/loss ratio because you have to respond according to the intraday situation. So, when we have the lowest win rate and lowest profit/loss ratio, we look for the investment ratio that does not cause loss of principal. This means that you can keep the minimum principal if you keep the profit/loss ratio compared to the winning percentage.

If you substitute an expression on the following site, it will be automatically graphed.

https://www.desmos.com/calculator?lang=ko

 

Wins: 3, Losses: 7
Profit ratio: 2.5, Loss ratio: 1

 

The maximum point is 0.02, which means that if you invest 2%, you will earn a profit of 0.5%. In other words, if you invest 0.02, the win rate must be 30% and the profit/loss ratio must exceed at least 2.5 to protect your principal. And because the secondary curve is inverted, if the investment ratio exceeds 2%, the rate of return actually falls.

 

When the win rate is 40%, you must invest 2.5% and the profit/loss ratio must exceed at least 1.6 to protect your principal

 

The Kelly standard/formula states that if the win rate and profit/loss ratio are large, the f value becomes very large. The disadvantage is that the psychological burden and the amplitude of profits/losses increase. So, you can readjust the investment ratio using the Half Kelly (divide the f value in half) formula.

 

 

------------------------------------------------------------------------------------------------------------------

https://accounts.binance.com/register?ref=21391362 <- Get Discount on Binance Futures Fees With Referral Code

Referral Code : 21391362

------------------------------------------------------------------------------------------------------------------