Kelly Criterion
A formula that calculates the theoretically optimal fraction of capital to risk per trade to maximise long-run account growth without ruin.
Formula
Kelly% = Win Rate − ((1 − Win Rate) / Win-Loss Ratio)
The Kelly Criterion gives the mathematically optimal bet size based on win rate and the win/loss ratio. It maximises the geometric growth rate of your account over a long series of trades.
In practice, full-Kelly is too aggressive for trading — a single bad run of variance can produce crippling drawdowns. Most traders use half-Kelly or quarter-Kelly to reduce volatility while retaining most of the growth benefit.
- Full-Kelly is only safe when edge estimates are very precise and variance is known — neither is true for most traders.
- Over-betting Kelly by even a small margin leads to eventual ruin.
Example
Win rate = 55%, avg win = $200, avg loss = $100 → Win/Loss ratio = 2. Kelly% = 0.55 − (0.45 / 2) = 0.325 → risk 32.5% per trade. Half-Kelly = 16.25% — still aggressive; most use 1–5% in practice.
Related Terms
Expectancy
The average dollar amount you expect to make per dollar risked, calculated from your win rate and average win/loss sizes.
IntermediateMoney Management
The set of rules governing how capital is allocated, how large positions are, and how losses are limited across a portfolio of trades.
BeginnerPosition Sizing
Calculating exactly how many shares, contracts, or lots to trade so that a stop-out costs no more than your chosen risk percentage.
BeginnerRisk of Ruin
The statistical probability that a trader will lose enough capital to be forced out of trading entirely, given their edge and risk per trade.
AdvancedRisk Per Trade
The percentage or dollar amount of your account you are willing to lose on a single trade. Typically 0.5–2% for most traders.
BeginnerWin Rate
The percentage of trades that close at a profit. High win rate does not guarantee profitability without a favourable risk-reward ratio.
Beginner