What Is the Kelly Criterion in Trading?

The Kelly criterion is a formula for the bet or risk size that maximizes long-run growth, given your win probability and payoff.

Formula

Kelly % = Win rate − (Loss rate ÷ Reward-to-risk)

Example

With a 45% win rate and 2R winners, Kelly = 0.45 − 0.55 ÷ 2 = 17.5% of the account per trade.

Why traders use less

Full Kelly assumes your statistics are exact and stable, and it produces very large drawdowns. Most traders use a quarter of Kelly or less, or cap risk at 0.5% to 2% per trade.

Try the Kelly criterion calculator. Related: risk of ruin, position sizing. See the trading glossary.