How much should you invest in each trade? The Kelly Bet.
Mar 12 in General discussion
How much should you invest in each trade? The Kelly Bet.
If you are looking to learn how to allocate your portfolio, then look no further than gamblers. (Yes - gambling)
In 1956, John Kelly devised a formula on how much you should invest each trade based on the win / loss ratio.
The formula is simple: Win % - Loss % = Your position size each trade.
For example:
If you have 60% win - 40% loss = 20% of your portfolio per trade.
This is the optimal allocation per trade.
However, sometimes you may misjudge your win rate (being too optimistic that you will make money)
So my suggestion is to cap your trade allocation to 10% max per trade (unless you are investing in index funds - then this rule can be broken).
There's also one more hack.
If you are able to create a stop loss at breakeven after the trade move in your favour, you can invest again as there's no more risk to your original capital after setting the stop loss.
Cheers,
Eric
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Eric Seto
Chartered Professional Accountant (CPA)
Chartered Investment Manager (CIM)
Founder of 5MinInvesting.com
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