Using the Kelly Criterion for Asset Allocation and Money Management

I'm quite new to Amibroker and AFL. I've recently read about the Kelly Criterion:

I would like to program this in Amibroker so that I can apply this to any lists of stocks and see the corresponding Kelly factor to the individual stocks.
I guess that's possible but if someone could give me a hint on how to accomplish that, I'd be really thankful.

Welcome BHG!

I have 2 suggestions:

  1. Try to program some other Position Sizing methods first, starting with the most basic one (fixed number of shares), then moving to something equally basic (fixed amount of $ or % of portfolio allocated to each position), and only then move to more complex stuff, which is not really that complex, like using ATR to decide the PS. I know I've seen an example for that in the manual, I think it's in the SetPositionSize page. The idea is to see how each of those PS methods impact the number of shares traded, so you get a feel for it. Also, you'll see the impact to the net results.

  2. Try to understand what the Kelly Criterion does and see if you even want to program it. For example, I just used it for one of my systems, which has the following metrics:

49% winners
average win 1.3 times the average loss

Therefore W = 0.49 and R = 1.3. If I plug these values into the Kelly Criterion formula, I get

K% = 0.49 - 0.51/1.3 ~= 0.1

According to the Investopedia page you gave in the original post, that means I should allocate 10% of my portfolio per trade! NO WAY I'm going to do that, as it will lead to ruin in very few steps... There might be more to this approach, because using just the info in that page seems to be outright dangerous!

I'm not sure what system you are trying to use the KC on, but the Investopedia page is way too short and simple for me to even take another look at the KC. There are other books out there that cover the Position Sizing (PS) topic in detail, however, one thing I have learned from my many years of system research and development is something that seems super obvious in retrospect:

You cannot take a losing system and change it into a winning one through PS. The system must be profitable with basic PS, and then, yes, you can do some interesting stuff to extract more money out of it, but it's never as easy as the KC page seems to imply...

Hope this helps!


Hi NextLevelForex!

I was thinking to apply this to a long term investment strategy for stocks that I want to keep holding but maybe just want to sell temporarily in an downwards market to reduce drawdown. So more as a indicator for medium term trend.
Thanks for your help!

Got it!

Maybe books like Dual Momentum Investing, by Gary Antonacci and Stocks on the Move, by Andreas F. Clenow could give you additional ideas of how to do what you are trying to do. The system I used as example is a very short term one, while those books talk about much longer term systems.

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Great! Thanks for the advice. I'll look into those!