The Kelly Criterion
Trading Intelligence
8 min read
Apply the Kelly formula and its fractional variants to find the theoretically optimal bet size that maximizes geometric growth rate.
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8 min read
Apply the Kelly formula and its fractional variants to find the theoretically optimal bet size that maximizes geometric growth rate.
Maximize long-term growth while minimizing blow-up risk — using math, not emotion.
Risk sizing is the silent killer of most trading accounts.
The Kelly Criterion gives you a mathematically optimal position size — balancing growth and drawdown risk.
It’s how professional gamblers, quant traders, and algorithmic funds scale with edge.
The Kelly Formula is designed to calculate the optimal fraction of capital to risk per trade, based on:
Kelly % = (Win Rate × R:R) – Loss Rate
Where:
You have:
Plug it in:
Kelly % = (0.55 × 2) – 0.45 = 1.1 – 0.45 = 0.65
You should risk 65% of capital per trade.
Way too aggressive, right?
Exactly. That’s why pros never use full Kelly.
Kelly was designed for:
But trading has:
So traders often use:
No EV → no Kelly position sizing → This motivates serious journaling and system tracking
Better EV → more risk Worse EV → scale down automatically
Smart traders size dynamically based on real data, not confidence or emotion.
Even at ½ Kelly:
Don’t use Kelly sizing if:
In these cases, static sizing (fixed % risk per trade) is safer until your data matures.
Kelly is not magic. It’s a mathematical framework to stop you from being emotional about risk.
It tells you:
Don’t risk based on confidence. Risk based on math.