Connect with us

Business

Phuket Finance: A time tested formula

Legacy Phuket Gazette

Published

 on 

PHUKET: A question I am often asked by clients, who do a bit of stock trading on their own portfolios, is how to determine the appropriate position size. Indeed, there have been studies that show that this aspect can be just as important as the actual security selection in the long run. The reason this is so important is that in short-term trading, as in many games of chance like roulette or blackjack, wins and losses tend to come in streaks. Back in the 1950s, a formula came out of research at Bell Laboratories that is still the backbone of the position sizing strategies for much of the investment world, and has even been slightly modified and applied to long term investing by such gurus as Bill Gross and Warren Buffet.

The formula I am referring to is called the Kelly Criterion. While I will include here for any fellow math nerds out there, you do not need to be one to incorporate the basic idea into your stock trading. You can use the basic idea to make it slightly more systematic than “I think I’ll buy 1,000 shares because it is a nice round number”, although there are some advantages to trading in round lots and not going into position sizes that are not divisible by 100 shares. Anyway, the formula is as follows:

For simple bets with two outcomes, one involving losing the entire amount bet (i.e the loss realized at your stop loss point), and the other involving winning the bet amount multiplied by the payoff odds (this could be a price target or your historical average winning %). The Kelly bet (see graphic) explaned is:

f* is the fraction of the current bankroll to wager;

b is the net odds received on the wager (“b to 1”); that is, you could win $b (and get a return of your $1 wagered) for a $1 bet;

p is the probability of winning;

q is the probability of losing, which is 1 – p.

In laymen’s terms, what this will yield is a proportion of your trading bankroll to risk on any one idea or trade, and this will be sensitive to the probability of a loss or a win. If you are a frequent trader, your own prior probability should be available from tracking your own success rate. Keep in mind that if you balance risk and reward, you can have a statistical edge even if you are only right 40% of the time. You simply need to make sure your losses are smaller than your gains by using stops and being disciplined enough to follow them.

The reason the formula works well is because as you experience a string of losses, each subsequent trade places less capital at risk, whereas during a winning streak, it edges up. The main thing to remember is that if you take your investment capital and allocate something like 10% as risk capital, you would only use that 10% as the bankroll in the above formula, not your entire life savings.

David Mayes MBA lives in Phuket and provides wealth management services to expatriates around the globe, focusing on UK pension transfers. Faramond UK is regulated by the FCA and provides advice on taxation and pensions. He can be reached at david.m@faramond.com or 085-335-8573.

— David Mayes

 

Get more from The Thaiger

📱 Download our app on Android or iOS
👋 Have your say on our Thailand forums
🔔 Subscribe to our daily email newsletter
📺 Subscribe / Join YouTube for daily shows
👍 Like/Follow us on Facebook
🐦 FOLLOW us on Twitter
📷 FOLLOW us on Instagram

image

Join the conversation and have your say on Thailand news published on The Thaiger.

Thaiger Talk is our new Thaiger Community where you can join the discussion on everything happening in Thailand right now.

Please note that articles are not posted to the forum instantly and can take up to 20 min before being visible. Click for more information and the Thaiger Talk Guidelines.

Click to comment

You must be logged in to post a comment Login

Leave a Reply

Archiving articles from the Phuket Gazette circa 1998 - 2017. View the Phuket Gazette online archive and Digital Gazette PDF Prints.

Follow Thaiger by email:

Weather12 hours ago

Flooded hospital in Chaiyaphum had to evacuates 40 patients

Thailand12 hours ago

300,000 more AstraZeneca vaccines donated from Japan arrived

Northern Thailand13 hours ago

Extremely rare earthstar mushrooms found in Phetchabun

Welcome back to Thailand!

Thaiger is getting behind local businesses for the restart of tourism in Thailand - up to 50% discounts across all advertising packages!

Weather14 hours ago

Flood warnings below Chao Phraya Dam, and across Thailand

Thailand16 hours ago

US calls meeting with Thai officials to resolve donated vaccines

Thailand17 hours ago

10 Burmese migrant workers arrested in Songkhla

image
Join the conversation on the Thaiger Talk forums today!
Thailand17 hours ago

Over 50 million vaccine doses administered in Thailand

Coronavirus (Covid-19)18 hours ago

Sunday Covid-19 Afternoon Update: Provincial Totals

World18 hours ago

China announces cryptocurrency trading is illegal

North East18 hours ago

Stolen 72 year old elephant returned to owner after 18 years

Thailand19 hours ago

Pattaya readjusts tourism goals for high season

Thailand20 hours ago

Phuket relaxes checkpoint requirements to help tourists and health officials

Phuket20 hours ago

Phuket Covid-19: 2 deaths, 4 Sandbox infections, 10k total cases

Thailand21 hours ago

Facebook page that claims to sell dog meat met with scorn on social media

Thailand22 hours ago

Thailand welcomes its first AI influencer, “AI Ailynn”

Thailand2 weeks ago

Morning Top Stories Thailand | Police to end protests, Human Trafficking | September 14

Thailand7 months ago

Thailand News Today | Thai Airways in rehab, All go for Songkran | March 4

Tourism7 months ago

Phuket’s nightlife. Yes, bars and clubs are still open | VIDEO

Phuket7 months ago

Thailand News Today | Covid passport talks, Thai Airways heads to court | March 2

Tourism7 months ago

Phuket Thai food treats you need to try | VIDEO

Thailand7 months ago

Thailand News Today | Bars, pubs and restaurants ‘sort of’ back to normal | Feb 23

Tourism7 months ago

In search of Cat & Dog Cafés in Phuket Town | VIDEO

Thailand8 months ago

Thailand News Today | Gambling crackdown, Seafood market to reopen, Vlogger challenge | Jan 21

Thailand8 months ago

Thailand News Today | Covid testing for visas, Business impact, Vaccine approval | January 19

Thailand8 months ago

Thailand News Today | Weekend Bangkok bombs, Thailand fires, Covid update | January 18

Thailand8 months ago

Thailand News Today | Stray car on runway, Indonesian quake, 300 baht tourist fee | January 15

Thailand9 months ago

Thailand News Today | Governor off respirator, sex-trafficking arrest, condo prices falling | January 14

Thailand9 months ago

Thailand News Today | Chinese vaccine, Thailand ‘drug hub’, Covid update | January 13

Thailand9 months ago

Thailand News Today | Bangkok may ease restrictions, Phuket bar curfew, Vaccine roll out | January 12

Thailand9 months ago

Thailand News Today | Covid latest, Cockfights closed down, Bryde’s Whale beached | January 11

Trending