Kelly Criterion: The Kelly criterion is a formula for sizing a position based on your edge and the price. It suggests what fraction of your bankroll to risk.

What it means

The Kelly criterion is a formula for sizing a position based on your edge and the price. It suggests what fraction of your bankroll to risk.

Example

With a 60% estimate on a 50¢ contract, full Kelly suggests risking 20% of your bankroll. Most people use a fraction, like a quarter or half Kelly, because estimates are uncertain.

Practical tip

Kelly is only as good as your probability estimate. Overconfidence leads to oversized bets; smaller fractions are safer.