Money Management Assistant based on Kelly formula
Money management is essential in trading and what differentiates a successful trader is usually the risk they take.
The common rule in trading is to risk 2% of the equity for every trade. That is what one can read on many websites. Although this is better than no money management at all, it is far from the optimal allocation and you can benefit much more from your successful trading strategy if used along with a proven asset allocation.
J. L. Kelly Jr. discovered the formula in 1956 while working for AT&T trying to reduce unwanted noise on high distance phone connections. Since then big investors have used it to maximize their profits.
The formula aims to maximize the profits given the ratio of profitable trades, the average payout of winning trades and that of losing trades. The results stand for the percentage of capital you should risk on each trade.
The formula is calculated as below:
Fraction of capital to risk on each trade = NumberW / NumberL – [(1 – NumberW / NumberL) / (CumulW/ CumulL)]
- NumberW: number of winning trades
- NumberL: number of losing trades
- CumulW: accumulated profits
- CumulL: accumulated losses
The indicator will search your order history and return a number of statistics:
- The number of winning trades,
- The number of losing trades,
- The total amount of profits,
- The total amount of losses,
- The winning probability for each trade,
- The expected payout per trade,
- The Kelly's formula result. It indicates how much of your capital you should risk on each trade to maximize your profits while reducing the risk of bankruptcy,
- The recommended risk to take, in the account currency.
- Make sure your AccountHistory tab displays the right period for the analysis.
- Simply attach the indicator to any chart to display the statistics on the top left. No user input is required.