We can use a simple example to illustrate this.
Let's just say in a couple of days, QQQ will drop to 415. You have 100K to invest. Should you buy QQQ at 415, and if so, how much should you buy?
Instead of buying it with a blind faith, you could consider the following factors
1: What is the probablity of QQQ going up from 415 and if so what could be the target for it
2: What is the probablity of QQQ going dwon from 415 and if so what is your stop loss
Just to throw some hypethetical numbers here, we could say for #1, the probability is 60% and target is 480 (this is the price before Taiff was annouced). For #2, we could say the probability is 40% and stop loss is 395 (this is the low on 4/7 and if we break here, market will go much lower)
In this hypothetical scenario, your winning probablity is 60%, losing probaiity is 40%, your win/loss ratio is 65/20 = 3.25
So, with Kelly formular, you would allocate 60%-(40%/3.25) = 47% of the $100K to buy QQQ at 415
Of course, in real life, you want to build enough buffer in case your probability and price target is off. For example, you can buy half of what Kellt formular indicates.
