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As superfragalist said, not enough attention here is paid to money
mangement (aka risk management, position sizing, etc.)
To make a contribution in that area, I'd like to present the so-called
Kelly Criterion, which comes to us from the world of professional
gambling:
%Kelly = W - (1 - W)/pf,
where
%Kelly is the percent of your account to dedicate to a trade (NOT to
exceed 20-25% ever, for reasons not explained but possibly having to
do with unaddressed variance issues),
W is the fraction winners = (total winning trades in the backtest)/
(total trades in the backtest (30 minimum?)),
pf is the profit factor = (average win)/(average loss).
So even if W <= 50%, %Kelly can still be positive if the pf is
sufficiently large.
Good trading,
kut2k2
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