Position Parameters
Once signals have been generated and prioritized based on investment goals, the last step is to figure out optimal position sizes for the day's signals.
Position Size
We then calculate the the Kelly Criterion to determine the ideal position size. The Kelly Criterion is a well-known formula that is used to determine the position size that maximizes the expected geometric growth rate of a portfolio.
𝑓∗ (Kelly Criterion) is the fraction of the current available liquidity to wager.
𝑝 is the probability of a win.
𝑞 is the probability of a loss (𝑞=1−𝑝).
𝑏 is the proportion of the bet gained with a win
The Kelly Criterion outputs an optimal allocation percentage of the free liquidity, and those numbers are compared to the max and min order sizes configured in the Watchlist settings.
For example, let's say a Watchlist has $10,000 in available liquidity to trade today, with max position size of $1500 and min of $500:
| Signal | Kelly Criterion | Position Size |
|---|---|---|
CHEEMS | 38% | $1,500 |
LINK | 8% | $800 |
PEPE | 3% | $0 |
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