Understanding Kelly Ratio

By Ahmad Hassam

In one of my articles, I talked about the criteria for developing a good mechanical trading system. There are many factors to consider while testing and evaluating a mechanical trading system. The important question is how to develop a trading system, evaluate it and then apply it with real money.

We need to not only know that the trading system is profitable but also whether it is profitable with limited equity swings. Does the trading system have excessive drawdown periods?

Three of the most important elements of trading systems are: 1) Clear cut rules for entry and exit. 2) Rules for exiting at profit targets and 3) Rules for exiting at loss targets.

Do losses exceed gains more than what is tolerable in the long run? Does the trading system experience periods of time that result in significant losses that give back those gains when a string of multiple winners and substantial profits accrue?

A money management tool used by system traders is the Kelly Formula or Ratio. John Kelly while working at AT&T Bell Labs had developed the formula in 1956. Most traders do not know when to correctly add on a trading position.

Gamblers realized its potential as an optimal betting system in horse racing. It soon became popular with the gamblers. This formula enabled gamblers to maximize the size of their bets on consecutive races.

Gamblers would use the Kelly Formula to determine how much to parlay winnings into the next bet. Kelly Formula used by many traders to determine how much money to place on the next trade.

Kelly Ratio is given by the formula: K=W-[(1-W)/R] where K is the Kelly Ratio in percentage. W is the winning probability and it is the probability that any given trade that you make will return a positive amount. R is the Win/Loss Ratio and it is the total positive trade amounts divided by the total negative trade amount.

Suppose K is 25% then you can risk 25% of your account on each trade. Kelly Ratio tells you what you should ideally be willing to risk on each trade to maximize your total returns in terms of the percent of your total account.

To be on the safe side you should half the ratio. Suppose K is 25%. You should half it to 12.5%. What it means is that you should not risk more than 12.5% of your account on a single trade. Many traders argue that the Kelly Formula gives too high a figure so half it to be on the safe side.

Kelly Formula can help you in comparing two trading systems. You can use it in deciding which one is better in the long run. You should look for a trading system that has the highest Kelly Ratio.

Back testing is used to evaluate the historical performance of a trading system. It shows the strength and weaknesses of each trading system in the long run. You can use the back testing results in the Kelly Formula.

So back testing combined with the Kelly Formula can help you achieve in most market conditions, the highest trading profits with the lowest risks. - 23159

About the Author:

Mr. Ahmad Hassam has done Masters from Harvard University. He is interested in day trading stocks and forex. Know The Candlestick Patterns. Learn Forex Trading.

What News Profiteer Is All About?

By Clark Tomlin

In the world of FOREX trading, Henry Liu has proved that it is merit, rather than associations with banks and other traders, that determines one's ultimate success, and he has proven his merit in the value that his unique News Profiteer system has brought to other traders.

According to him there is always a technical angle to present to a trader. Various lines of market trends and candlestick charts need to be evaluated. There are also Fibonacci retracements that should be considered. However, these technical evaluations do not prepare the trader for all market uncertainties. There is also a mental angle that needs to be considered. Traders can gain a toehold on money that baits them, which can result in greed and fear.

He also feels that market pundits fail time and time again to accurately account for the impact of specific news items on the FOREX market. His newsletter provides an account of what these pundits miss, while remaining objective and fair.

The news these pundits fail to account for is highly tradeable material- boardroom dividend declarations and important mergers- and so, in his newsletter, he provides detailed analysis of it and its effect on the market. With this analysis, the reader will be able to more effectively determine the proper trade.

In his e-book, Liu describes methods to remain on the good side of the system and to generate as many as 25-30 pips per trade. His news profiteer system effectively eliminates the inconsistency gradient associated with trading.

Henry Liu always generates excitement with the way he is able to trade in any market, from London to Nikkei, and in any market condition. Twenty five to Thirty pips per trade are not insignificant. Yet, his success is based on the principals of fundamental news analysis that intelligent traders are able to benefit from by reading his newsletter.

According to Liu, there are two types of traders. The first learns all the technical jargon and understands its execution. Those people grace forums and online trade rooms, but there are never enough shekels in their live accounts. The second understands the theories of rally and correction and support and resistance. If they also understand the effect of fundamental news on world Forex trade they will be the eventual winners in the market.

News profiteer will give you the best knowledge of market cycles and precise times to enter and exit the markets, among other important details. If you believe in the power of news release, you will draw shekels you never thought possible. - 23159

About the Author:

If you'd like to know more about News Profiteer, then it's important to check out this site: Forex Trading Machine Review.

Forex Trading, Is It For You?

By Bart Icles

Before entering the rewarding yet unpredictable realm of forex trading, it is definitely plus if you have taken time to learn the basics of foreign current trading and understand the different types of approaches that you can take. There are so many ways to participate in the currency market and it is almost too easy to find yourself lost in its various jargons and changing trends. Just before you get daunted by this thought, it is worth mentioning that there are various strategies and systems that you can use to learn more about the basics and secrets of forex trading.

Going online and searching for forex trading resources is one way to familiarize yourself with the basics of forex trading. Information on different forex systems are also available on the web. Learning the basics and being familiar with different forex trading systems can help you a lot in determining which approach to take.

Forex trading is never easy but with forex trading systems, starting your career as an investor in this market can be less complicated and traumatic. The first steps you take as a trader would most likely determine your success or failure. It is therefore important that you are able to choose the right system to help you in your forex trading career. There are also seasoned traders who are willing to share with you some tips on which approaches are generally profitable. You can easily lookup forex trading websites and you will notice that most of the tips there are from seasoned forex investors.

If you are starting a forex trading career just to test the waters, better discontinue your efforts because forex trading was never meant for cutting teeth. Beginners can easily get their fingers burned since forex trading is of the high risk kind. Also, if you are not receptive to pressure, better not subject yourself to forex trading because you will have a lot of it on your shoulders once you have made a trader out of yourself.

Becoming a forex trader is never an easy goal. If you are thinking of becoming a trader, see to it that you have thought well about joining its profitable yet volatile environment. Evaluate yourself and try to determine if you are indeed cut out to handle the pressure before having success in this market. Forex trading does not have a get rich quick guarantee. Success in forex trading does not come overnight, so it pays to take the time to learn more about this market, understand its trends, and be familiar with the different strategies and systems. - 23159

About the Author:

Forex Trading are powerful when coupled with a desire to learn and a drive to become a great trader. Learning with a Hedging Forex strategy takes away from your education, learning an honest strategy takes time but once you learn how to trade and do so successfully your life will change and you have options and financial resources you never had before.

Penny Stocks Market

By Marco Davies

You ought to know that the Penny stocks are usually proposed by a company having less than three years and has less than 5 million dollars in solid assets, or a concern that has a minimum of 3 years in business, and has under two million dollars in tangible assets or a business has 6 million dollars tax revenue for three years. There's a seasoned market for the penny stocks, nevertheless these stocks and shares have very determined liquidity. This is merely one of the grounds for the penny stock market's unpredictability, all the same these markets remain very popular.

Penny shares, are now and again also termed as 'micro cap', are low valued shares normally traded in the over the counter market. Nearly all of the stocks and shares are obtainable for a penny that is why these are known as penny stocks.

OTCBB: OTCBB provides accurate details for more than 3000 stocks including real time, quotations presentation, last sale price and volumes. These equities are ordinarily not dealt with in any leading stock markets. The OTCBB electronically furnishes real-time quotations for home as well as foreign stocks and shares, plus it shows past days dealing activity in DPPs. There is in excess of two hundred market makers are certified at the OTCBB with over the counter or OTC bulletin boards chosen over pink sheets.

Pink Sheets: The Pink sheets is published and sustained by Pink Sheets LLC and it shows bid and requested quotation costs of different penny stocks. Concerns listed in pink sheets are the most risky as most of the businesses simply meet the minimal prerequisite for listing, although penny stocks at pink sheets are lightly bought and sold. A good many businesses pay dealers] for dealing these penny stocks and therefore some traders|agents] use deceptive activities to sell the stocks and obtain money from people.

In some of the instances, only a few market makers are actively engaged in a limited penny stocks and buy and sell these specific sureties only. Dealing with a market maker is preferred, as the market maker not simply sells the specified stocks and shares but it also buys the stocks or shares. Around 230 market makers are accredited by the OTCBB and these market makers purchase and sell stocks on a frequent basis. It is also preferred to observe that a greater amount of market makers are around for specified stocks as the less market makers there are around, will often determine or control the specified stocks. In examples such as these the investment in the particular penny stock is risky because these few market makers can manipulate the costs of the stocks and thus can maintain a wide gap between the sale and buying values of the stock. It wasn't that long ago that a few of the market makers were discovered to be engaged in deceptive activities.

There is a full-fledged market of penny stocks which are traded at OTCBB and pink sheets. Over The Counter Bulletin Board is regulated by the regulations of the Securities and Exchange Commission of the US. - 23159

About the Author:

Understanding all there is to know about penny-stocks-market is not always easy. Luckily you can get everything you need right here at penny stock market

A Sneak Preview Of The Hector Trader Forex Training

By Terry Law

As a trader, I know there are tricks of the trade and wisdom that can only be learned through speaking with long time traders. Learning from their experience make me a better trader. I recently attended the Hector Trader Forex Trading Course and would like to share my impression of the experience.

One way to learn more is to search for and explore blogs related to Forex trading. This is how I found Hector, who is a full-time trader. I was immediately impressed by the the professional feel of his videos and the sharp, clean quality of his website.

I decided to stream some of his audio commentaries. Even though I was initially somewhat dismissive of Hector because of his heavy accent, I saw that he was providing good information and making really helpful points. I continued to listen to the audio lectures. Hector is very specific and to the point, analyzing charts accurately and succinctly.

Strangely, after a while, I really began to like his accent. I am not sure what his native language may be, perhaps Spanish, but he speaks English with a British accent. I think I like his double "o" catch phrase the best. I decided to sign up for the complete course and was amazed at the amount of information provided, including lot of videos. And I can watch them anytime, so I can learn at a pace that works best for me and my schedule.

His technique is simple, on the surface, but it takes time and effort to master just like any successful system. Hectors videos guide you through real-world situations to help you apply his simple system and master it. Be sure to back test his system as well.

There are also written lessons and other materials that are supplements to the videos. Hector makes these usually dry reads humorous and easy to to follow. Hector also provides the Metatrader indicators that go with his system.

A very helpful tip I gleaned from the Hector Trader Forex Trading Course is not to sign up immediately for a level retest. It is better to wait for the price to be discounted because the risk is lower at the reduced price that it would be at the original breakout. This is the method I used on my last several successful trades.

Hectors course is well within the reach of most aspiring traders, and a great value for the price. I highly recommend this Forex Trading Course as a place to start or continue your trading education. - 23159

About the Author:

If you want to find out more about HectorTrader, then you need to check out this website: Forex Mentor Review