Funded Forex Trader : What is Kelly Criterion and how to use in trading ? - AudaCity | Empowering Profitable Traders Since 2012

Funded Forex Trader : What is Kelly Criterion and how to use in trading ?

J.L Kelly, a scientific researcher is credited with coming up with the Kelly Criterion in 1956. Since then, it has gone on to become a renowned strategy used by betting enthusiasts around the globe. The best remote prop trading firms use the criterion to maximize the probable return of a given investment or bet.

Apart from its well-known applications in sports betting, funded forex traders have also been known to use it in the financial markets. It has become popular amongst bettors despite being a bit complex and involving a certain degree of risk.

The Kelly Criterion—What Is It?

Before you get paid to trade forex, you should understand how the Kelly Criterion functions. This simple mathematical formula is relied on to establish a staking level to use on a given type of bet. It involves calculating the amounts expected as returns from the initial bet. The resulting figure then gets applied to the betting bank in use by a bettor.

While this may seem straightforward to a funded forex trader, you have to note that it does have certain elements of complication. For instance, when the expected probability is high, the stake level will be high, and this will, in turn, help to maximise the returns.

Therefore, for the best remote prop trading firms to use this formula correctly, they will need to determine the probability of a particular bet emerging victorious.

Advantages

As you get paid to trade forex, you will realise that the main advantage offered by this criterion is in assisting you to find a balance between safety and risk. It also helps you to find a balance between safeguarding your current bank and growing it. If you are good at establishing the chances of a bet winning, this criterion provides you with an opportunity to benefit from your skill.

The second benefit of this criterion is that it’s not complicated to use. You become familiar with it after executing a few calculations. In case you need some assistance, there are numerous calculators available online. Using this system, you also get to identify bets or investments that are not likely to offer you any value.

When you complete your calculations and the system gives you a negative number as the answer, this is a warning not to invest or make any bets.

Disadvantages

A major drawback to using this criterion is that it’s dependent on the traders’ ability to consistently and correctly calculate the actual chances of each investment. A trader using inaccurate estimates will end up with incorrect trade size recommendations after using the formula. It also leads to inefficient or poor use of your trading bank.

Secondly, the Kelly Criterion is characteristically forceful. This can cause a funded forex trader to utilise a big portion of their trading balance. There are times when you may have to halve the stake, instead of using the full balance as recommended by the system. Halving the trade balance offers better protection for your balance as opposed to relying on the percentages offered and risking the entire balance.