Kelly Criterion Strategy Allocation

Entry Logic

• Long entry: The Kelly Criterion formula is used to determine the optimal position size for a trade, based on its win rate and win/loss ratio. The goal is to maximize the long-term growth of the portfolio.
• Short entry: Same as above.
• Confirmation: The win rate and win/loss ratio of the strategy must be known with a high degree of confidence.
• Timeframe: Any.
• Location: Any.
• Market Condition: Any.

Exit Logic

• Profit Target: As per the strategy rules.
• Scaling Out: Not applicable.
• Trailing Stop: Not applicable.
• Signal Failure: Not applicable.
• Opposite Signal: Not applicable.
• Time Expiration: Not applicable.
• Momentum Loss: Not applicable.

Stop Loss Structure

• Hard Stop: As per the strategy rules.
• Soft Stop: Not applicable.
• Max Dollar Loss: Not applicable.
• Max Percent Loss: The Kelly Criterion determines the percentage of the portfolio to risk.
• Structural Stop: As per the strategy rules.

Risk Management Framework

• Risk Per Trade: Determined by the Kelly Criterion.
• Daily Limit: Not applicable.
• Weekly Limit: Not applicable.
• Max Drawdown: The Kelly Criterion can lead to large drawdowns, so a fractional Kelly approach is often used.
• R:R Requirement: A key input to the Kelly formula.

Position Sizing Model

• Sizing Approach: The Kelly Criterion.
• Volatility Adjustment: Not a direct input, but it is reflected in the win/loss ratio.
• Conviction Sizing: The Kelly Criterion is the ultimate conviction sizing model.
• Scaling In: Not applicable.
• Scaling Out: Not applicable.

Trade Filtering

• Market Conditions: Any.
• Setups: Any strategy with a known statistical edge.
• Instruments: Any.
• Time Restrictions: Any.
• Chop/News Avoidance: Any.

Context Framework

• Trend Direction: Not applicable.
• VWAP Relationship: Not applicable.
• MA Relationship: Not applicable.
• Range Location: Not applicable.
• Higher TF Alignment: Not applicable.

Trade Management Rules

• Breakeven: Not applicable.
• Scale Out: Not applicable.
• Add Size: Not applicable.
• Fast vs Slow Moves: Not applicable.

Time Rules

• Optimal Window: Any.
• Times to Avoid: Any.
• Session Notes: A mathematically optimal, but psychologically difficult, approach to position sizing.

Setup Classification

• A+ Setup: A strategy with a high win rate and a high win/loss ratio.
• A Setup: A strategy with a good statistical edge.
• B Setup: A strategy with a marginal edge.
• C Setup: A strategy with no edge.

Market Selection Criteria

• Instruments: Any.
• Volume: Any.
• Volatility: Any.

Statistical Edge Metrics

• Win Rate: A key input to the Kelly formula.
• Avg Win: A key input to the Kelly formula.
• Avg Loss: A key input to the Kelly formula.
• Profit Factor: A key input to the Kelly formula.
• Expectancy: A key input to the Kelly formula.

Failure Conditions

• Market Conditions: When the statistical properties of the strategy change.
• Specific Scenarios: The historical data used to calculate the Kelly fraction is not representative of the current market.

Psychological Rules

• Mental Discipline: The ability to withstand large drawdowns and stick to the mathematically optimal position size.

Advanced Components

• Regime Detection: The Kelly fraction can be adjusted based on the market regime.
• Filters: Not applicable.
• Correlation: The Kelly Criterion can be extended to a multi-asset portfolio.
• MTF Alignment: Not applicable.

Location

• Strongest: In the long run, it should outperform any other position sizing strategy.
• Weakest: In the short run, it can lead to severe drawdowns.