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<DIV><FONT color=#800000 size=2>Re: <STRONG><U>The Kelly
Criterion</U></STRONG></FONT></DIV>
<DIV><FONT color=#800000 size=2><STRONG><U></U></STRONG></FONT> </DIV>
<DIV><FONT color=#800000 size=2>Walt,</FONT></DIV>
<DIV><FONT color=#800000 size=2></FONT> </DIV>
<DIV>
<DIV><FONT color=#800000 size=2>In 1730, logarithmic utility was first
introduced by Daniel Bernoulli. (Todhunter, I., <EM>A History of the
Mathematical Theory of Probability, </EM>1st edition, Cambridge, 1865, as
reprinted by Chelsea, New York, 1965).</FONT></DIV>
<DIV><FONT color=#800000 size=2></FONT><FONT color=#800000
size=2></FONT> </DIV>
<DIV><FONT color=#800000 size=2>In 1956, logarithmic utility was distinguished
by its properties from other utilities when </FONT><FONT color=#800000
size=2>John L. Kelly, Jr., an engineer with the Bell Telephone</FONT></DIV>
<DIV><FONT color=#800000 size=2>Company, published his research on efficient
transmission of electrical signals. (Kelly, J.L., "A New
Interpretation of Information Rate", <EM>Bell System Technical
Journal </EM>(July 1956), 917-926<EM>.</EM>)</FONT></DIV></DIV>
<DIV><FONT color=#800000 size=2></FONT> </DIV>
<DIV><FONT color=#800000 size=2>In 1960, Brieman expanded its application.
(Brieman, L., "Investment Policies for Expanding Business Optimal in a Long
Run Sense", <EM>Naval Research Logistics Quarterly </EM>7 : 4 (1960),
647-651; Brieman, L., "Optimal Gambling Systems for Favorable
Games", <EM>Symposium on Probability and Statistics 4th, Berkley, 1961,
</EM>1 pp. 65-78).</FONT></DIV>
<DIV><FONT color=#800000 size=2></FONT> </DIV>
<DIV><FONT color=#800000 size=2>In 1971, Edward Thorp used the Kelly
Criterion to develop investment strategies. ("Portfolio Choice and
the Kelly Criterion" first published in the 1971 Business and Economics
Statistics Section Proceedings of the American Statistical Association, and
later reprinted in the book <EM>Stochastic Optimization Models in Finance,</EM>
edited by William T. Ziemba and Raymond G. Vickson. New York: Academic
Press, 1975, pages 599-619.)</FONT></DIV>
<DIV><FONT color=#800000 size=2></FONT> </DIV>
<DIV><FONT color=#800000 size=2>regards,</FONT></DIV>
<DIV><FONT color=#800000 size=2></FONT> </DIV>
<DIV><FONT color=#800000 size=2>Jeff Stewart</FONT></DIV>
<DIV><FONT color=#800000 size=2>Atlanta, Georgia</FONT></DIV>
<DIV><FONT color=#800000 size=2><EM></EM></FONT> </DIV>
<DIV><FONT color=#000000
size=2>----------------------------------------------------------------------------------------------------------------------------------------</FONT></DIV>
<DIV>The Kelly criterion</DIV>
<DIV><FONT face=Arial size=2>-----Original Message-----<BR>From: Walt Downs
<knight@xxxxxxxxxxxx><BR>To:
RealTraders Discussion Group <<A
href="mailto:realtraders@xxxxxxxxxxxxxx";>realtraders@xxxxxxxxxxxxxx</A>><BR>Date:
Saturday, January 09, 1999 1:17 PM<BR>Subject: Trading GEN: Info on Kelly
Principle<BR><BR></DIV></FONT>>Hi all,<BR>><BR>>A few month's back some
RT's were discussing the basics of the<BR>>"Kelly Principle", a
form of statistical adjustment that might<BR>>have value in relation to trade
size.<BR>><BR>>I am interested in the original source of this principle.
I.e.,<BR>>the full name of the author and what book this principal
is<BR>>discussed in.<BR>><BR>>Thanks,<BR>>Walt Downs<BR>>CIS
Trading<BR>><BR>></BODY></HTML>
</x-html>From ???@??? Sat Jan 09 13:36:40 1999
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Date: Sat, 09 Jan 1999 14:39:52 -0600
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From: Terry Wyss <tlwyss@xxxxxxxxxxx>
To: RealTraders Discussion Group <realtraders@xxxxxxxxxxxxxx>
Subject: Re: Accutrader -- The Truth vs Bashing
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Bill,
Thank you kindly for this well thought out
encouragement to those
of us attempting to learn how to scalp the S&P
consistently. I'm about
a break-even trader right now, and have invested
considerable time, effort
and money to learn how to do so profitably and
consistently. I have no
inclination to quit now and, encouragement and ideas
from those who are
successful is certainly what I need right now, not
misguided though well
meaning pontificating from inexperienced or position
traders, or sour grapes
from failed quitters. I have a sign on my office wall
that has the encouraging
admonishment: "Achieve the Impossible!" and I fully
intend to do just that.
Wishing you prosperous trading on your own terms,
Terry
bshumake wrote:
> I have been reading with amusement the various posts
> warning people away from George Heffernan's
> Accutrader. The amusing parts are the speculation
> that one cannot trade the S&P with 1 point stops and
> strive to make profits in the 1 and 2 point range.
> The part about not being able to have 80%+
> returnswas also pretty good. While I, like the
> people criticizing Accutrader, have not traded the
> system, I do know that the claims are feasible. I
> day trade the S&P using 2 minute charts ( accutrader
> uses 3 or 5 minute charts ) so it is definitely
> possible to trade that short of a time frame. My
> accuracy while not 85%, is currently 79.6% which is
> not far removed, I am sure there are some cynics
> that would tell people 79% is not possible. Lastly
> I never risk more that 1 1/2 points on a trade, and
> more often than not, risk only 1 point per trade. I
> have been consistently profitable since I began
> trading this method, which is a mechanical, momentum
> based system that uses simple off-the-shelf
> indicators and one price pattern. Also if you ask me
> what my slippage is I will tell you it is zero...the
> reason is, I am scalping to pick up profits between
> 1 and 2 points. My target which uses a limit order (
> no slippage with those ) is always between 1 and 2
> points from where I enter the market ( not from where
> my entry stop is ), My commissions are $20.oo per
> round turn. Please don't buy into the notion the
> trades must be docked $200 or even $100 when looking
> at a track record, that can be drastically affected
> by the type of order used as well as where the order
> is placed. I suspect the idea of $100-$200 slippage
> originated from some classic trading techniques that
> would have you place an order in the same area where
> hundreds of other orders are placed. Also please
> don't begrudge someone for selling their system as
> there are some good reasons for doing so. It could
> be the trader has developed a decent system, but has
> no capital or is under capitalized ( I did call
> George Heffernan about his system and this is the
> reason he gave for selling it. ) Another good reason
> for selling a system is that it is not compatible
> with your personality. I can attest that day trading
> is much more stressful than position trading ( for me
> anyway ). So if a position trader develops a good
> day trading system, trys it for a while but finds it
> too stressful, he may decide to sell it and return to
> position trading. This doesn't mean that the system
> was not good or did not make money, it simply means
> that it was not a good fit for that particular
> trader...it could be a marriage made in heaven for
> someone else. I am a good example of this, as I
> have been position trading for many years, but have
> been interested in diversifying over multiple time
> frames so developed the daytrading methodology I am
> currently using. While it is proving to be very
> profitable it is also proving to be a very intense
> form of trading and more stressful than I
> anticipated...in other words, while I continue to
> trade it, I am not yet convinced that it is a good
> match for my personality ( I am currently hoping my
> personality will adjust somewhat, given time ).
> Trading, aside from being profitable, must also be
> done in a way that is enjoyable. Life is too short
> to have it any other way. It is relatively easy to
> develop a profitable system. It is much harder to
> implement that system in real trading due to our
> human emotions of fear and greed ( But where would
> the markets be without fear and greed?).There are
> some very good system developers in the world such as
> Tom DeMark, who do not trade because they do not have
> the disposition for it, but instead opt to sell their
> services to others. DeMark for example, was on Tudor
> Jones' payroll for several years. Here is an example
> of a great trader, Jones, buying systems from a
> developer, DeMark. Lastly, do not assume that because
> someone is profitable in a daytrading or scalping
> environment that they would automatically be
> profitable in a money management or hedge fund
> environment. I know that my own system, while very
> profitable trading small lots ( 5 contracts is
> probably the upper limit ), is simply not a feasible
> approach when trading larger lots. The result would
> simply be partially filled orders, which would
> quickly erode profits down to zero. To trade
> hundreds of millions or often even millions of
> dollars takes a much longer term approach than Mr.
> heffernan's system provides. So even if it is as
> profitable as he claims ( and it could be ), there
> is a good reason he is not snatched up by a hedge
> fund and made a super star trader...his system simply
> is inappropriate for that scale of trading and would
> not work. This is analogous to saying that a
> profitable floor trader could be placed in an
> off-floor environment and still be profitable using
> his old floor trading methods. He wouldn't be, he
> would have to adopt new methods or go broke. In
> closing, let me urge you not to be cynical about good
> claims. Certainly there are charlatans and cheats
> around, just as in any business, you often have to
> sift through the crap to find the nuggets. In
> accutraders case, a written money back guarantee is
> offered. Also when ordering trading books,systems,
> etc, just use a credit card and you can always have
> the charge revoked ( I have done this on one occasion
> ).Also with regards to cynicism, remember there are
> plenty of "respectable" financial advisor types that
> when asked about someone making money in futures (
> say Richard Dennis, Tudor Jones, or Linda Raschke )
> will tell the questioner ( with a bit of a haughty
> laugh ) that it is simply not possible, that " if it
> sounds to good to be true it probably is." As a
> result, their client walks away from what might have
> been a very rewarding and profitable pursuit.. All
> the Best !Bill Shumake
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