The Ultimate Trading Strategy: How to Combine Kelly Criteria and Monte Carlo Simulation
A Gambling Problem
Have you ever stared down at your hand in a game of Texas Hold’em, knew your hand was good enough to bet, but didn’t know how much to throw in the middle? Or have you ever had a fairly good trading strategy, but you weren’t sure how much money to yolo into the markets? You’re not the only one. Bet sizing, whether it’s in poker, sports, or the stock market is just as important as the strategy you're using to determine when to play. What do we do in this situation? Do we throw everything in and pray you’re running hot at the table? Or do we take a more conservative route and always bet 10% of your stack. Ideally, we would bet whatever generates the most wealth in the long term, but flawed thinking often gets in the way. Too many times, I have seen a poker tournament lost or a trade turn bad because of something idiotic. It might be as simple as thinking the dealer is out to get you, so you play a little more conservative, or that the hot girl that blew on the dice was really good luck, so you stuck everything in there. We know logically neither of these are good long-term strategies, but people blow billions in Vegas and in the market. If only there was a simpler solution for bet sizing. I introduce The Kelly Criterion!
