Vollständiges Transkript von „The $1,000,000 Trading Formula Nobody Talks About“. Klicke auf einen Zeitstempel, um das Video an dieser Stelle zu öffnen. Du brauchst ein anderes Video? Nutze den YouTube-Transkript-Generator.
0:00 The man you are seeing on the screen is Edward O. Thorp, one of the first people to prove that mathematics could be used to make money in financial markets. Edward Thorp was a mathematics professor. In the early 1960s, he used probability and statistics to solve what seemed like an impossible problem. He discovered a way to beat the casinos in Las Vegas using a blackjack card counting strategy. As a result, casinos in Las Vegas were eventually forced to change blackjack rules across the United States. After conquering the gambling world, Edward Thorp turned his attention to the financial markets. At that time, computer technology was extremely
0:46 limited. Market data was difficult to access and the idea of using mathematical models to trade was almost unthinkable. But Thorp proved otherwise. He applied probability and statistical models to trade stocks and options and over time he built a fortune of more than $800 million from the financial markets. One of the most important formulas in his career is known as the Kelly criterion. So what exactly is the Kelly formula? Before we dive deeper into the Kelly formula, we first need to understand the problem it was designed to solve in trading. Imagine you have a trading system with a statistical edge. For
1:32 example, you win about 55% of your trades and each winning trade makes twice as much as what you risk. From a probability standpoint, this is a system with a positive expected value. If you repeat enough trades, the theory suggests you should be profitable in the long run. But at this point, a much more important question appears, one that matters even more than finding the perfect entry or exit. How much capital should you allocate to each trade? If you risk too little, even a profitable system will grow your account very slowly. That's true even if you occasionally catch stocks that move several times higher. But if you risk too much, a short losing streak can
2:19 cause serious damage to your account. This is the exact problem that John L. Kelly Jr. solved in 1956. Kelly developed a formula that determines the optimal fraction of capital to allocate to each bet in a way that maximizes the long-term growth rate of wealth while avoiding excessive risk that could lead to ruin. That formula later became known as the Kelly criterion. So how does the Kelly formula actually work? The version most commonly used by traders is F = W - 1 - W / R where F is the fraction of capital to allocate to
3:05 each trade. W is the probability of winning or the win rate. R is the reward to risk ratio. At first glance, the formula may look technical, but the underlying idea is actually quite simple. Kelly is trying to find the optimal balance between growth and risk. If you allocate too little capital, your account will grow, but not at the maximum possible rate. But if you allocate too much, even a short losing streak can cause significant damage. Let's go back to the example from earlier. Suppose your trading system has win rate 55% reward to risk 2:1. In other words, you
3:52 risk $1 to make two. Applying the Kelly formula, F = 55% minus 1 - 55% / 2. The result is 0.325. This means that according to Kelly's theory, the optimal fraction for each trade would be 32.5% of the account. That sounds extremely aggressive, and in reality, it is. In practice, very few traders use full Kelly. The reason is that the Kelly formula is built on several idealized assumptions such as the systems win rate is known with precision and the statistical edge remains stable over
4:39 time. But in real markets, these conditions rarely hold. Markets change constantly and the performance of any trading system can vary across different periods. If you apply full Kelly, the account may experience very deep draw downs. Many empirical studies suggest draw downs can reach 40 to 60% even when the system has a real edge. Because of this, many traders and investment funds prefer to use a fraction of Kelly instead. For example, half Kelly about 16% quarter Kelly about 8%. Reducing the fraction lowers account volatility while still preserving much of the long-term
5:25 growth benefits that the Kelly framework provides. At this point, there is one very important thing to understand. The Kelly formula is not a magical tool for predicting the market. It does not tell you which stock will go up and it does not help you determine the perfect entry or exit. The only thing Kelly is trying to do is maximize the long-term compound growth rate of your capital. This is an extremely important concept in finance. In trading and investing, wealth rarely grows in a straight line. Instead, it tends to follow an exponential curve driven by the effect of compound returns. This means that in the early years growth may appear relatively modest, but as profits are continuously
6:13 reinvested, the size of the account begins to grow faster and faster over time. To see this more clearly, imagine a simple example. Suppose you start with $100,000. Your account grows at 20% per year. All profits are reinvested and you add $20,000 of new capital each year. In that case, after 5 years, the account would be around $339,000. After 10 years, it grows to roughly $1.03 million. After 20 years, the account could reach approximately $9.8 million. The key point here is not just the 20% annual return, but the combination of compounding and
6:58 consistent capital contributions, which creates an extremely powerful exponential growth effect over time. What's interesting is that most of the growth happens in the later stages when profits begin generating additional profits. This is the power of compound growth. and Kelly was designed to find the optimal level of risk per trade so that this compounding effect can be used as efficiently as possible. If you allocate too little capital, the account will still grow, but the compounding effect will not be fully optimized. On the other hand, if you allocate too much capital, account volatility increases dramatically, and even a short losing streak can destroy much of the previous growth. Kelly attempts to solve exactly
7:45 this problem. Finding the balance between growth and risk so that an account can grow steadily and efficiently over the long term. Conclusion. Looking back at the entire story, there is an important lesson that the Kelly formula leaves behind. Trading is not just about finding a good trading system. Many people spend enormous amounts of time searching for the perfect entry, the perfect exit, or increasingly complex indicators. But in reality, even if you have a system with a statistical edge, that alone is still not enough to guarantee success. Because the final outcome of your account does not depend only on how often you are
8:31 right. It also depends on how much capital you allocate to each trade. This is the problem of position sizing. You may have a very good system, but if you allocate too much capital on each trade, a short losing streak can still cause severe damage to your account. On the other hand, even a system with a relatively small edge can produce stable long-term growth if it is combined with disciplined capital management. That is the core idea behind the Kelly formula to determine the appropriate fraction of capital for each trade so that the growth of the account can unfold efficiently and sustainably over the long term. And perhaps this is one of
9:16 the most important lessons in trading. It is not the most complex system that wins in the market. It is the trader who manages risk and capital the best. All the content I share is completely free. If you found this video helpful, don't forget to hit like and subscribe to the channel. Your support is a huge motivation for me to continue creating more in-depth trading analysis videos in the future. If you've been struggling in the market, jumping from strategy to strategy, watching profits disappear, and still feeling unsure about what actually works, then the trading program I'm running right now was built for you. On the screen in front of you, you're seeing the real results of my students.
10:03 Many of them have become consistently profitable, past funding challenges, and now manage capital with confidence and discipline. In the past, students paid thousands of dollars to attend this training in person. But today, I'm making the entire program available almost completely free. You only pay $25. That $25 is not tuition. It's commitment. To be completely transparent, after YouTube's 30% cut and taxes, I barely receive anything. But I didn't make it free for one simple reason. When something costs nothing, people don't take it seriously. When there's even a small cost, they show up, stay consistent, and actually do the work. $25 is the price of a couple of
10:51 Starbucks drinks. Yet, it could save you years of trial and error and potentially tens or even hundreds of thousands of dollars in trading losses. I've opened the door. The only question now is, will you take it? You can join through the YouTube membership program or click the link in the video description.
