My concern is how to handle a negative value for the Kelly formula. Even when you have a system that has positive expectancy, you can (and usually will) sustain a number of losses, sometimes consecutively. This is usually most relevant at the beginning of trading system signals, each loss has a large impact on the formula. How would one handle trade signals when the Kelly formula turns negative? This is assuming a long only system. It seems to me if you ignore the trade signal you would never recover back to a positive probability since your choice to not take the trade would negate any chance to recover.
Some clarifications: I am writing software for a mechanical trading system. I can run backtest simulations to get a sense of historical "edge" and "odds". My confusion is how to apply the Kelly formula once the system goes live and I am making trades based on the system signals. I want to use actual trade data to calculate the Kelly %. Should I use backtest data for the previous x trades and then walk that data forward as I make new trades? Should I just use backtest odds and edge until I have enough live data to use?