Kelly Criterion
A formula for optimal position sizing based on edge and odds, maximizing long-term growth.
Formula
More Details
What is Kelly Criterion?
Kelly Criterion calculates the optimal percentage of capital to risk on each trade to maximize long-term growth, given your edge.
Formula
K = W - (1 - W) / R
Where:
- K = Kelly percentage (fraction of capital)
- W = Win rate (decimal)
- R = Win/Loss ratio (avg win / avg loss)
Example
- Win rate: 55%
- Avg win: $300
- Avg loss: $200
- R = 300/200 = 1.5
K = 0.55 - (0.45 / 1.5) = 0.55 - 0.30 = 0.25 = 25%
Full Kelly suggests risking 25% per trade.
Why Full Kelly Is Dangerous
Full Kelly:
- Maximizes geometric growth
- Assumes perfect knowledge of edge
- Creates MASSIVE volatility
- One miscalculation = ruin
Practical Kelly (Fractional)
Most traders use:
- Half Kelly (0.5K): 50% of calculated
- Quarter Kelly (0.25K): 25% of calculated
This sacrifices some growth for much lower volatility.
Kelly by Strategy Edge
| Edge | Full Kelly | Half Kelly |
|---|---|---|
| Small (10%) | 5-8% | 2.5-4% |
| Medium (20%) | 15-25% | 7.5-12.5% |
| Strong (30%) | 25-40% | 12.5-20% |
Where to find it in TradesViz
Example
55% win rate with 1.5 R:R = 25% Kelly, suggesting 12.5% with half-Kelly