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 12-24-2012, 06:23 PM #1 xxl_w1 self-banned   Join Date: Jul 2008 Posts: 664 risk management on an event with 75% chances to win Let's suppose you bet on an event with 75% chances to win. If you lose you lose 1 bet, if you win you win 1 bet. So the risk:reward ratio is 1:1 You have a starting amount of money and are allowed to bet whatever amount do you want but if you lose all your money you're out of the game. What % of that amount would you bet? 50% would be too much, 1% would be too less. You are allowed to make that bet only 3 times a month, so you can't bet whenever you want (risking a tiny % because you can make that bet non stop won't work, you can make it only 3 times a month).
 12-25-2012, 12:42 PM #2 RustyBrooks Carpal \'Tunnel     Join Date: Feb 2006 Location: Austin, TX Posts: 23,071 Re: risk management on an event with 75% chances to win This is a basic kelly criterion question. The kelly criterion tells you what fraction of your bankroll to bet to maximize bankroll growth. This is somewhat aggressive for some people so they will sometimes use a fraction of the result of the KC, i.e. "fractional kelly". Your situation is the easiest kind of calculate. The KC is f = (bp - q) / b where b is the payout in b:1 format, p is the chance to win, q is the chance to lose (1-p usually) Here the payout is 1:1 so b = 1, therefore f = p - q = p - (1-p) = p - 1 + p = 2p - 1 Since p = 75%, f = 50%
 12-25-2012, 12:53 PM #3 xxl_w1 self-banned   Join Date: Jul 2008 Posts: 664 Re: risk management on an event with 75% chances to win 50%? But the risk of ruin is high. I want the RoR to be 0 or close to 0. If I lose all my money I'm out of the game.
 12-25-2012, 12:57 PM #4 RustyBrooks Carpal \'Tunnel     Join Date: Feb 2006 Location: Austin, TX Posts: 23,071 Re: risk management on an event with 75% chances to win The risk of ruin at 50% of bankroll is very low. Almost 0 - well under 1% (Edit: the actual risk of ruin is 0 if you're allowed to keep betting arbitrarily small amounts of money. If there's a minimum bet, then the ROR is dependent on the ratio between that and your bankroll) Say you start with 1000. Your first bet is 500. If you lose, your next bet is 250. Do you see how it's very hard to go broke?
 12-25-2012, 01:03 PM #5 RustyBrooks Carpal \'Tunnel     Join Date: Feb 2006 Location: Austin, TX Posts: 23,071 Re: risk management on an event with 75% chances to win I suck at math but I wrote a quick simulation. Betting 50% of your bankroll, let's assume that the minimum bet size is 1 unit, i.e. you are broke if you ever have less than 1 unit. Here is the RoR for various BR sizes: 1000: .04% 100: .67% 10: 7.5% So you can see even with a very modest bankroll compared to the minbet size, your RoR is not bad.
12-25-2012, 01:26 PM   #6
xxl_w1
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Re: risk management on an event with 75% chances to win

Quote:
 Originally Posted by RustyBrooks Say you start with 1000. Your first bet is 500. If you lose, your next bet is 250. Do you see how it's very hard to go broke?
I thought my next bet would be 500, not 250. Now I understand.

 12-25-2012, 01:45 PM #7 xxl_w1 self-banned   Join Date: Jul 2008 Posts: 664 Re: risk management on an event with 75% chances to win Now I will add another rule: I am only allowed to bet fixed amounts. That fixed amount is a % of my initial bankroll. How big should be that % in order to RoR to be 0 or close to 0 if the reward:risk is 1:1 and the probability is 75% How about if the reward:risk ratio is only 0.5:1?
 12-25-2012, 02:11 PM #8 matrix_testing_ans stranger   Join Date: Nov 2012 Posts: 8 Re: risk management on an event with 75% chances to win It all comes down to the kelly criteria. This is used often and extensively, like hedge funds.
12-25-2012, 03:43 PM   #9
heehaww
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Join Date: Aug 2011
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Re: risk management on an event with 75% chances to win

Quote:
 Now I will add another rule: I am only allowed to bet fixed amounts....
Okay now it depends on two things:
1) Are you going to quit after a predefined profit?
2) Are you asking the risk of EVER going broke, or going broke in some finite number of bets N?

 12-25-2012, 04:30 PM #10 xxl_w1 self-banned   Join Date: Jul 2008 Posts: 664 Re: risk management on an event with 75% chances to win No. I'm not going to quit. I want to risk fixed amounts (for instance 10% of my initial bankroll) if my bankroll is smaller or equal to my initial bankroll and to risk a % of my current bankroll only if my current bankroll is bigger than my initial bankroll. For instance i start with \$100 000. I will start to risk let's say \$10 000 and if my bankroll is smaller than \$100 000 I will continue to risk \$10 000 until I will go broke. However if I will have \$110 000 I will risk 10% of 110 000. The win rate is 75% and the payoff is either 0.5:1 or 1:1. I want to find what's a good % of my initial bankroll for the case in which my current bankroll is smaller or equal to my current bankroll. I want to use fixed amounts because if I will be unlucky it will be hard to recover if I continue to use a % of my current bankroll. I'm asking these questions for forex trading.
12-26-2012, 02:25 PM   #12
xxl_w1
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Join Date: Jul 2008
Posts: 664
Re: risk management on an event with 75% chances to win

Quote:
 Originally Posted by BruceZ If you played forever getting 1:1 payoffs as a 3:1 favorite, your risk of ruin is simply (1/3)^n where n if the number of bets in your bankroll.
What is the formula for 2:1 or 0.5:1 payoffs?
I think you used ((1-edge) / (1+edge))^n

For 1:1 the edge is 0.5
But for other payoffs how do I calculate edge?

12-29-2012, 04:31 PM   #13
WhyDid I doThat :|
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Re: risk management on an event with 75% chances to win

Quote:
 Originally Posted by RustyBrooks The risk of ruin at 50% of bankroll is very low. Almost 0 - well under 1% (Edit: the actual risk of ruin is 0 if you're allowed to keep betting arbitrarily small amounts of money. If there's a minimum bet, then the ROR is dependent on the ratio between that and your bankroll) Say you start with 1000. Your first bet is 500. If you lose, your next bet is 250. Do you see how it's very hard to go broke?
I like u man, your smart

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