kelly-position_skill

Overview

This skill calculates position sizes using the Kelly criterion to balance long-term growth against drawdown risk. It supports full Kelly, fractional Kelly (e.g., 1/2 or 1/4 Kelly), and portfolio-level normalization to keep total exposure within limits. Implemented for integration in Rust-based agents, it returns clear numerical recommendations and risk context.

How this skill works

Given inputs like win rate (p), win/loss payoff ratio (b), or statistical estimates (expected return μ and variance σ²), the skill computes the optimal Kelly fraction using the core formulas: full Kelly f* = (b p - q) / b and simplified f = μ / σ². It then applies fractional scaling, enforces configurable min/max position caps, and normalizes across multiple positions for portfolio sizing. The output includes the raw Kelly value, recommended traded fraction, a risk grade, and an explanation of limits.

When to use it

• When deciding position size for a single trade or strategy after estimating win rate and payoff ratio
• When you have statistical estimates of expected return and variance and want a variance-based size
• When you need conservative sizing via fractional Kelly to reduce volatility
• When managing multiple positions and requiring normalized total exposure
• When wanting automated, reproducible position-sizing recommendations in a Rust agent

Best practices

• Prefer fractional Kelly (1/4 or 1/2) for live trading to limit volatility and estimation error
• Set a hard per-position cap (commonly 20–25%) to avoid concentration risk
• Treat Kelly < 2% as a signal to skip opening a new position
• Normalize recommended fractions so portfolio total exposure respects your risk budget
• Regularly update p, b, μ and σ² with fresh data; estimation error materially affects Kelly outputs

Example use cases

• Compute full and 1/4-Kelly for a strategy with 60% win rate and 1.5 reward/risk
• Turn statistical backtest μ and σ² into a variance-based position fraction for automated sizing
• Normalize individual Kelly recommendations across ten signals to keep total exposure ≤ 50%
• Automatically enforce minimum size thresholds and per-trade caps before sending orders
• Provide decision support in a trading assistant implemented in Rust