Kelly criterion

I was discussing this with a trader today and wondering on some other people's thoughts.
http://www.investopedia.com/articles/trading/04/091504.asp

Supposedly with a win ratio of 60:40 and a RR of 1:1, we should make each trade with 20% risk (could reduce to 10% to allow for errors).

It seems common knowledge that traders use around 2%. Why the discrepancy between that and what the Kelly criterion says is the best risk amount?

There's all sorts of issues with Kelly... There's a lot written about it.

Martinghoul said:

There's all sorts of issues with Kelly... There's a lot written about it.

Click to expand...

Seems to be common for stock investors but maybe that's just because of when it was published. You can put 10% capital into an equity but the risk of the stock going to zero is very small. However, it was originally designed for horse racing.

some optimisations include: http://www.brainyforex.com/position-sizing-methods.html
Most people in trading seem to used fixed sum trades.

Any other thoughts?
the standard 2-5% risk for trading must come from somewhere...either that or it is one of the trading folklaw things...

SanMiguel already told you, it was originally made for other porpouses, not preciselly horse races, but in fact not for the markets.
Why the percentage differ?, well that is a matter of money management.
I can put in risk an amount which in case of a sudden reversal will not cause me a loss that can risk or erase my account, many use 2%, others claim 0.5% and the most agressive say 5% is a good parameter, the main problem is not the percentage but the criteria you will follow to close a losing position. It depends on your system and your risk/money management criteria.

SanMiguel said:

Any other thoughts?
the standard 2-5% risk for trading must come from somewhere...either that or it is one of the trading folklaw things...

Click to expand...

Here is a paper you should read from a real guru, not authors who never traded:

http://www.tradingpatterns.com/Literature/Kelly.pdf

This paper will answer most of your questions. It answered all mine.

P.S. Here is another one from the same author:

http://www.tradingpatterns.com/Literature/PositionSizing.pdf

Read that too, it is a good piece.