Optimal Capital Allocation
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Finding the optimal capital allocation in trading is most likely not very well understood by most traders and is also underrated. The balance between attack and defense is often a thin line. Most of us are optimists and we rarely watch out below. What is the optimal capital allocation in trading?
The optimal capital allocation is mostly a theoretical exercise and hard to find and implement in practice, but we recommend spending some time on understanding the theory behind optimal capital allocation:
You can calculate the optimal capital allocation in trading by using two very simple formulas: the Kelly Criterion and a formula provided by Wolf von Rönik.
Our blog, Quantified Strategies, has more about what is the optimal capital allocation in trading.
Something that not often is taken in to account in these type of calculations is unrealized losses in trading.
Understanding the effects of unrealized losses is even more important when working with leverage.
Typically mean reversing strategies comes out with a high win ratio and high average profits, which will indicate big allocation per trade. However biggest loosing trades are normally very big and maximum draw down on those trades much bigger, the allocation calculation will most likely indicate a much bigger allocation than what you are comfortable with…