Optimize reinvestment by flattening

[Reto Meister]

In a volatile strategy playing with some risk capital, I have generally an average risk level of 30% - per month.

Default is to just reinvest all the gains made, and hope for better (accelerated) gains in the future. However, I've seen there is a superior strategy.
I now take out half the profit if I have a winning month, and put this part on a saving account. If I have a loosing month, I reinvest half the loss by taking this amount from the saving account.

This strategy does flatten the profit and is less prone to losses.

Taking out 50% and reinvesting 50% is just my gut feeling. I am looking for perfect values based on past performance. Does anyone have some experience, or can even share the formula with me?

Thanks a lot!

 

[Yike Lu]

http://en.wikipedia.org/wiki/Kelly_criterion

 

[yetanotherquant]

Kelly_criterion

Yes, exactly!
It maximizes the expected growth rate, the median of the terminal wealth and has some other nice properties.

In a volatile strategy!

But be careful with volatility
The larger it is the smaller growth rate you can achieve in the long run.
Have a look at http://www.yetanotherquant.com/teaser.pdf
(pp. 25 - 27)

 

[Reto Meister]

great. thanks a lot for the Kelly criterion!