Kelly Criteria: Risk vs Capital

By: Don Heggen
Submitted: 2007-01-17 16:16:38
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Kelly Criteria is a money management system used by gamblers that relates, or "sizes", ones' bets to ones' risk capital.

Like all good ideas, Kelly Criteria stands out because, not only is it easy to understand and apply, it is fundamentally sound.

This money management method allows you to stay in the game longer by conserving capital during periods of loss and also increases your positions during periods of profitability. It practically eliminates the "risk of ruin". And it accomplishes all this automatically.

It is the exact opposite of the typical losers' psychological behavior, known as "steaming" or "going off tilt", when attempting to come from behind by risking increasingly larger sums in an effort to get back to "even".

When they get away with it, it only encourages them. Eventually, they dig themselves deeper and deeper in the hole until they go broke.

In applying the Kelly Criteria as a money management tool in a trading situation, determine the percentage of ones' capital to be risked on each trade. After the outcome of a trade, one adds the profit or subtracts the loss from ones' capital account and risks the same percentage of the remaining capital on the next trade.

That's all there is to it. Simple.

Because No One Cares More About Your Money Than You

http://dynamic-stock-market-strategies.com

Good trading,
Don Heggen

Article source: Expert Articles

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