Lua Source to calculate Kelly Criteria Investment Level

Lua Source demonstration of using Kelly Criteria to figure out appropriate amount to risk for any single trade based on your current capital, odds of winning and win versus loss payout.

Risking the full portion recommended by Kelly Criteria is considered too risky by many investors.   Those investors tend to chose to invest 1/2 or 1/3 of what the Kelly formula recommends  Ed Thorp’s white paper discusses the impact on capital growth when trading partial Kelly.

No Promises, No Warranty, Please use this as only an example and and independently confirm that it is producing the desired results.

Kelly % = W – [(1 – W) / R]
  W = Probability of winning 0.0 to 1.0
  R = Payout ratio 0.0 to 1.0

Lua Kelly Criteria Source

function round4(anum)
 return math.floor(anum * 10000) / 10000
end 


function kelly_invest(bankroll, winProb, oddsRatio)
 local lossProb = 1 - winProb
 local kellyPerc = winProb - ((1 - winProb) / oddsRatio)
 local recomendInvest = bankroll * kellyPerc
 return kellyPerc, recomendInvest
end

function odds_ratio(avgOnWin, avgOnLoss)
 return avgOnWin / avgOnLoss
end

function test_kelly()
 function kelly_testp(bankroll, winProb, oddsRatio)
   kp, ri = kelly_invest(bankroll, winProb, oddsRatio)
   print( "kelly -- bankroll=" .. bankroll .. " winProb=" .. winProb 
          .. " oddsRatio=" .. round4(oddsRatio) .. " Kelly Ratio=" .. round4(kp)
          .. " Kelly Investment=" .. round4(ri) )
 end

-- Convert our Average Win / Loss to a Payout
 local avgWin = 185.32
 local avgLoss = 210.13
 local odr = odds_ratio(avgWin,avgLoss)
 print("avgWin=" .. avgWin .. " avgLoss=" .. avgLoss .. " oddsRatio=" .. round4(odr))

-- Calcuate Kelly Investment for some test conditions
 kelly_testp(1000, 0.56, odr)
 kelly_testp(1000, 0.71, odr )
 kelly_testp(1000, 0.71, 1.2)
 kelly_testp(1000, 0.71, 0.7)
 kelly_testp(1000, 0.60, 1.0)
end

test_kelly()

• See Also

  • http://www.valueinvestingworld.com/2013/05/ed-thorp-jack-schwager-and-kelly.html
  • http://www.edwardothorp.com/sitebuildercontent/sitebuilderfiles/Column23understandingthekellycriterion.doc
  • http://www.investopedia.com/articles/trading/04/091504.asp
  • http://www.elem.com/~btilly/kelly-criterion/
  • http://www.albionresearch.com/kelly/default.php

Thanks Joseph Ellsworth
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