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I'm taking a look at my trading history over a particular time period and have 500 trades on with an win rate of 82%. My average win is $W$. My average loss is $L$. So am I correct in assuming the Kelly Criterion is:

$$ \frac{0.82 \times (W / L + 1) - 1}{W / L} $$

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According to Skiena (link page 21) the Kelly fraction in the case of wins all equal to W and losses all equal to L is:

$$f=\frac{pW-qL}{WL}=p/L-q/W$$

where $q=1-p$ and $p$ is the probability of a win.

When the wins and losses are random, with average $W$ and $L$ respectively, I am not sure this formula is completely justified. But it might be a good approximation

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  • $\begingroup$ But is it fair to use my existing track record to justify the p, W and L? $\endgroup$ – Shamoon Oct 17 '17 at 20:18
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When it comes to Kelly, I've always liked the explanation at http://www.financialwisdomforum.org/gummy-stuff/kelly-ratio.htm. At this link there are three versions of Kelly explained, if you don't mind the "chatty" style. The third version brings in the standard deviation of wins and losses, which I think is very useful.

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