How to Trade with the Kelly Criterion

*🚀 Master Quantitative Skills with Quant Guild* https://quantguild.com *📈 Interactive Brokers for Algorithmic Trading* https://www.interactivebrokers.com/mkt/?src=quantguildY&url=%2Fen%2Fwhyib%2Foverview.php *👾 Join the Quant Guild Discord server here* https://discord.com/invite/MJ4FU2c6c3 ___________________________________________ *🪐 Jupyter Notebook* https://github.com/romanmichaelpaolucci/Quant-Guild-Library/blob/main/2025%20Video%20Lectures/36.%20How%20to%20Trade%20with%20the%20Kelly%20Criterion/how_to_trade_with_the_kelly_criterion.ipynb Developing a valid trading signal and system to execute trades based on that signal are only a few pieces of the puzzle - how much of our capital should we risk on any given trade? Here we look to the Kelly Criterion to determine what proportion of our bankroll we should allocate to any given trade to maximize the expected value of our wealth path. Of course, these parameters must be estimated from data, that data is noisy, so are those estimates - and of course, this is just one methodology for producing a quantity to risk. Nevertheless, the Kelly Criterion remains a useful quantity to base decisions off of. Typically, we will alter the bet size up or down relative to the theoretical quantity - but that is a discussion for another day! - Roman ___________________________________________ *📖 Chapters:* 00:00 - Introduction 00:46 - Expected Value of a Trading System 02:06 - Trading Edge: Accumulating Expected Value 04:22 - Appropriate Bet Sizing 05:00 - Fixed v. Dynamic Betting 06:40 - Losing Money with Positive EV 07:42 - Flaw of Averages 08:30 - Kelly Criterion 10:20 - Trading with the Kelly Criterion 12:24 - Challenges with the Kelly Criterion in Practice 13:36 - Estimation Error in Kelly Criterion 14:45 - Closing Thoughts and Future Topics ___________________________________________ *▶️ Related Videos* *Expected Stock Returns Don't Exist* https://youtu.be/iXNSBn5xqrA *How to Trade* https://youtu.be/NqOj__PaMec *How to Trade with an Edge* https://youtu.be/NlqpDB2BhxE ___________________________________________ *🗂️ Resources* *📚 Quant Guild Library:* https://github.com/romanmichaelpaolucci/Quant-Guild-Library *🌎 GitHub:* https://github.com/RomanMichaelPaolucci https://github.com/Quant-Guild *📝 Medium (Blog):* https://quantguild.medium.com/ https://medium.com/quant-guild ___________________________________________ *🛠️ Projects* *The Gaussian Cookbook:* https://gaussiancookbook.com *Recipes for simulating stochastic processes:* https://papers.ssrn.com/sol3/papers.cfm?abstract_id=5332011 ___________________________________________ *💬 Socials* *TikTok:* https://www.tiktok.com/@quantguild *Instagram:* https://www.instagram.com/quantguild/ *X/Twitter:* https://x.com/quantguild/ *LinkedIn (personal):* https://www.linkedin.com/in/rmp99/ *LinkedIn (company):* https://www.linkedin.com/company/quant-guild ___________________________________________