Risk of ruin = [ {1-(W-L)}/{1+(W-L)}] Power of U
W = Probability of winning, L= Probability of losing and U= # of units of money on the account.
E.g W is 56%, L is 44%, U is 5 .
Risk of ruin = [ {1-(0.56-0.44)}/{1+(0.56-0.44)}] power of 5 = 30%
You must avoiding risk of ruin, achieve ZERO% risk of ruin. E.g Using 20 U and min 63% W, and min 1.5 win to loss trade.
2) Expectancy
Expected return $$ = [ P of winning x Ave win/Ave loss ]-[P of loasing x Ave win/Ave loss ]
High Expectancy can be achieve with low accuracy e.g 30% but high Ave Win vs Ave Loss
Trend Trading min Positive expectancy with P of winning 34% with 3 to 1 Win/Loss ratio.
3) Holy Grail = Positive Expectancy x Opportunities
| 4) Kelly Formula Kelly Formula F= (R+1)*P-1)/R |
| P= % accuracy of the system winning |
| R= Ratio of winning trade to losing trade |
| E.g Accuracy P 65% and win R 1.3 size of loss F= (1.3+1)*0.65-1)/1.3= 85% |
