Advanced Trading Strategies
Episode 2: How to calculate your Stoploss
This should’ve probably been the first episode but i needed something spicier, lets get into it NO BS.
I call it the GodsonModifiedKellyFormula; Calculating your SL using this strategy requires you know the probability of success for your entries.
Very quick, Very simple using a modified Kelly Criterion: 2P-1; where P is the probability of success in decimal form.
for example here i backtest my Script on the Daily Timeframe with a long only bias and a 10% takeprofit.
the success probability is >70% so therefore the Kelly is (2*0.7)-1 which is 0.4
This means you can only bet 40% of your portfolio on each trade, AKA you can bet 100% of your portfolio but with a 40% stoploss or margin your portfolio 10x with a 4% stoploss.
Now i know what you’re saying but Godson, how do i trade with leverage without risking liquidation. what if the long dumps 10% before hitting my take profit.
Answer: Options Contracts!
with options you can leverage a trade upto 100x without risking liquidation.