I believe the argument is even stronger (that there is no relation between confidence and accuracy) in sports betting. I can't take any handicapper seriously who has different levels of 'star' wagers. It's ridiculous.

Compound gains faster In shorter time intervals by staying in the core trend and monetizing countertrend simultaneously via hedging, with fractional risk capital outlay/lower drawdowns/adverse excursions/volatility In aggregate vs waiting for the long protracted move in one shot which may not materialize

followed you each week on these newsletters. This has been your best one so far. Any chance we could see the table that you speak of in Chapter 11? If the answer is buy the book and see. I totally get it :)

Brent, do you have thoughts on reworking the % of capital to risk formula you laid out to instead calculate the breakeven expected value probability given a trade's risk/reward in place of the win% and avg. win/loss? You could then assess whether you think the trade has a higher probability of working out than the breakeven and size accordingly. This sort of gets at the core of the kelly criterion directionally and provides a rough guide on when you may want to size up/down or sit a trade out.

Example: for an expected value of 0 by risking 1 to make 3 the probability would be 25%. If you think the odds are more like 30% you would take the bet. If you think they're more like 35% you put more at risk.

It doesn't account for outcomes in between the target and stop but I suppose you could find a way to incorporate a distribution if you were up for it

% of Capital to Risk = Win% - ((1-Win%)/(AverageWin/AverageLoss))

Could you please point me to its origins in academic research or something? To be honest, I'm not a fan, primarily because in the limit AverageLoss --> 0 it tells you to invest only 50%. Clearly a wrong answer.

That is the kelly criterion formula see link below. it's one of the most used formulas in bet sizing, wagering, trading and so on. Take a look at the link just in case there is confusion in my wording or i messed somethign up when typing it out ..

You are right. I wasn't thinking about the impossible combination of having 50% win chance and very small loss. Apologies. I have a professional habit of taking all formulas to the limit but in this case the inputs were not independent and I wasn't thinking straight.

To make up for my silly mistake, let me share with you the formula for the optimal Kelly ratio for the lognormal portfolio: it's Sharpe ratio divided by the standard deviation. I was told that it can be found in one of the Merton's book (Continuous Time Finance?) but I didn't want to pay so I derived it myself. Quite easy. You probably knew that but I am happy to share if you did not.

Good stuff.

I believe the argument is even stronger (that there is no relation between confidence and accuracy) in sports betting. I can't take any handicapper seriously who has different levels of 'star' wagers. It's ridiculous.

Awesome post again, Thanks!

Brent, how do you size for longer term trades eg 6 months? You'd naturally want a bigger payout for a long wait like that?

Compound gains faster In shorter time intervals by staying in the core trend and monetizing countertrend simultaneously via hedging, with fractional risk capital outlay/lower drawdowns/adverse excursions/volatility In aggregate vs waiting for the long protracted move in one shot which may not materialize

followed you each week on these newsletters. This has been your best one so far. Any chance we could see the table that you speak of in Chapter 11? If the answer is buy the book and see. I totally get it :)

Great topic. Love to see the results of the survey.

Should do the survey as a tweet to the broader Fintwit

Brent, do you have thoughts on reworking the % of capital to risk formula you laid out to instead calculate the breakeven expected value probability given a trade's risk/reward in place of the win% and avg. win/loss? You could then assess whether you think the trade has a higher probability of working out than the breakeven and size accordingly. This sort of gets at the core of the kelly criterion directionally and provides a rough guide on when you may want to size up/down or sit a trade out.

Example: for an expected value of 0 by risking 1 to make 3 the probability would be 25%. If you think the odds are more like 30% you would take the bet. If you think they're more like 35% you put more at risk.

It doesn't account for outcomes in between the target and stop but I suppose you could find a way to incorporate a distribution if you were up for it

Hi Brent,

I am intrigued by the formula

% of Capital to Risk = Win% - ((1-Win%)/(AverageWin/AverageLoss))

Could you please point me to its origins in academic research or something? To be honest, I'm not a fan, primarily because in the limit AverageLoss --> 0 it tells you to invest only 50%. Clearly a wrong answer.

Average loss zero is not possible so don’t worry about that as a variable. Average loss for a trader cannot be zero that would not make sense right.

Even Renaissance loses money some days 😃

That is the kelly criterion formula see link below. it's one of the most used formulas in bet sizing, wagering, trading and so on. Take a look at the link just in case there is confusion in my wording or i messed somethign up when typing it out ..

https://corporatefinanceinstitute.com/resources/knowledge/trading-investing/kelly-criterion/#:~:text=It%20is%20based%20on%20the,of%20winning%20and%20losing%2C%20respectively.

You are right. I wasn't thinking about the impossible combination of having 50% win chance and very small loss. Apologies. I have a professional habit of taking all formulas to the limit but in this case the inputs were not independent and I wasn't thinking straight.

To make up for my silly mistake, let me share with you the formula for the optimal Kelly ratio for the lognormal portfolio: it's Sharpe ratio divided by the standard deviation. I was told that it can be found in one of the Merton's book (Continuous Time Finance?) but I didn't want to pay so I derived it myself. Quite easy. You probably knew that but I am happy to share if you did not.

Cool thanks I was not aware of this I’ll check out the book thanks !