To create the best chance of having
profitable trades, OmiCronFX uses the Mandelbrot algorithmic routine in two
ways: (1) as a tool for carrying our research and (2) as the means by which the
actual trades are placed and managed.
To achieve success in trading, it is
essential to create a situation where probability is on your side.
The
Kelly Criterion
The Kelly Criterion is a mathematical
formula that was developed by J. L. Kelly Jr. in 1956, for use in sports
betting. It uses the possibility that the bettor may be able to determine that
an edge exists over the odds that are offered for a particular outcome.
As an example, consider a series of horse
races where the person placing the bets is able to calculate that a particular runner
has a better chance of winning than the official odds would suggest, over a
large number of races. Then the person placing the bets has an edge. The Kelly
formula relates that edge to the odds so that the desirability of placing a
proportion of the amount available on the horse in increased.
To apply the Kelly Criterion to
Forex, OmiCronFX makes some assumptions. One is that the odds of an outcome are
equal to the historical record of the number
of profitable trades over a period, given as a percentage of the total number
of trades taken. For the same trades, the edge is the ratio of the cash value
of the profitable trades to the cash value of the losing trades. The principle
is shown in the illustration at the top, where we used this idea to analyse
trading on the first trading day of each month for the first half of 2015. There
were no market moving scheduled reports on these days, so we wanted to
determine the desirability of even being in the market at all.
We ran Mandelbrot with its standard
criteria set on historical data for each of the first monthly trading days. There
were a total of 16 trades taken. For the London session, 6 out of 8, or 75%,
were winners. In the NY session, 4 out of 8, or 50%, were winners. For the same
trades, the cash value of the profits in the London sessions were over three
times those of the losses. In the New York session losses actually exceeded
profits.
Putting all of the outcomes together in
the Kelly Formula provided a Kelly percent outcome of 67.44% for the London
session on the first trading day of the month, and a negative 6.71% for the New
York session. The Kelly rules say that when the percent outcome is negative, no
position should be taken, so we would not trade the New York session on the
first day of the month. The London session outcome indicates that it should be
traded, and Mandelbrot did indeed take a position at the London open yesterday.
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