**Re: Kelly Criterion**
As per a book i am reading, Kelly criteria is maybe too aggressive for trading, 1-2% may be safer once you have an edge. If you are still not profitable, better keep minimum qty.

The problem is that we are unsure of the future win % and RR ratio of trading systems. I guess that is the reason most books recommend 1-2% risk.

For example, if a system has a Win % of 50% and RR ratio of 1.6, then the optimal risk is 18.75% of compounded capital on every trade.

- If we risk 19% per trade, then after 100 trades, the capital will be 15.42 times the initial capital (1442% return on capital)

- If we risk 18% per trade, then after 100 trades, the capital will be 15.36 times the initial capital

- If we risk 15% per trade, then after 100 trades, the capital will be 13.87 times the initial capital

- If we risk 10% per trade, then after 100 trades, the capital will be 8.61 times the initial capital

- If we risk 5% per trade, then after 100 trades, the capital will be 3.61 times the initial capital

- If we risk 2% per trade, then after 100 trades, the capital will be 1.76 times the initial capital (76% return on capital - not too bad)

- If we risk 1% per trade, then after 100 trades, the capital will be 1.34 times the initial capital (34% return on capital)

The return with 19% risk looks grand... but there could be practical difficulties.

1. Will the Win % and RR ratio of the system hold into the future?

2. What happens when the system hits a continuous losing streak? According to calculations, we should still continue to risk the optimal risk %, if the system will get back to the Win % and RR ratio in future.

3. Margin requirements may limit position size, and not allow optimal risk.

4. The market/s may not have sufficient liquidity to allow compounding of position size.

5. With increased position size, slippages and fills may be affected. This will also impact the Win %, RR ratio, and % of Capital risked.

Questions 4 and 5 only become relevant when the position size increases significantly. For a small trader, only question 1 to 3 are relevant, and the answer is that we should try to risk close to the optimal risk to get better return on capital.