The Kelly Criterion is the mathematical formula that tells you exactly how much to risk on each trade. Legendary investors from Ed Thorp to Warren Buffett have used it.
The Formula
Kelly %% = (W × (1 + R) - 1) / R
Where:
- W = Win Rate (as decimal)
- R = Win/Loss Ratio (average win ÷ average loss)
Example Calculations
Scenario 1: High win rate, low R
Win Rate: 70%, Win/Loss Ratio: 1:1 (Win = Loss)
Kelly = (0.70 × 2 - 1) / 1 = 0.40 → Bet 40% of capital
Scenario 2: Low win rate, high R
Win Rate: 40%, Win/Loss Ratio: 3:1
Kelly = (0.40 × 4 - 0.60) / 3 = 0.33 → Bet 33% of capital
Why Full Kelly Is Too Risky
If you bet full Kelly and your inputs are off by even 10%, you can experience massive drawdowns. Most professionals use:
- ¼ Kelly — Conservative growth, low drawdown risk
- ½ Kelly — Good growth, moderate drawdowns
Tools to Calculate Kelly
The free trading toolkit at blog.quant-view.xyz/tools/ includes a Kelly Criterion calculator that lets you input your strategy stats and see recommended position sizes.
Discuss position sizing strategies at t.me/GFIL_Trading or Discord.
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