Trading term
What is Kelly criterion?
The Kelly criterion is a formula for the bet size that maximises the long-run growth of capital, given your edge and your payoff. For a 40% win rate paying 2:1 it says risk 10% — and most traders deliberately bet less.
For a payoff of b to 1 with win probability p, Kelly says stake the fraction f = (bp − q) ÷ b, where q is the probability of losing. With p = 0.40, q = 0.60 and b = 2, that gives (0.8 − 0.6) ÷ 2 = 0.10, or 10% of capital per trade. Bet that fraction repeatedly and capital compounds faster than at any other constant fraction.
The shape of the growth curve is the part worth internalising. Growth rises to the Kelly peak and then falls away sharply — betting twice Kelly produces almost no growth at all, and betting three times it is reliably ruinous. The penalty for over-betting is far worse than the penalty for under-betting, which is why practitioners commonly use half-Kelly: it retains roughly three-quarters of the growth rate with substantially smaller swings.
In trading the honest caveat is that Kelly needs your true edge as an input, and nobody knows theirs precisely. An overestimated win rate produces an oversized bet in exactly the direction that does the most damage — which is why full Kelly is a theoretical ceiling rather than a recommendation.
Growth peaks at 10% of capital for this edge, then collapses — 2× Kelly earns almost nothing. Under-betting costs a little; over-betting costs everything.
For example
A system wins 40% of the time with winners twice the size of losers. Kelly says 10% of capital per trade. Half-Kelly — 5% — keeps about 76% of the growth rate with far shallower drawdowns. Betting 20% earns almost nothing despite the same edge, and 30% loses money.
Go hands-on in Premium
That's Kelly criterion in theory — it clicks when you read it on a live chart. Practise it hands-on in the TradeWize Premium Trading Psychology & Risk track.
Explore Premium →Why it matters to you
Kelly makes explicit something most traders never quantify: that there is an optimum bet size, that it is finite, and that exceeding it destroys returns even when the edge is real. Understanding that curve is what stops a profitable strategy from being ruined by the sizing decision on top of it.
⚠ Full Kelly is a ceiling, not a target
Kelly assumes you know your edge exactly and that outcomes are independent — neither holds in trading. Overestimate your win rate slightly and full Kelly becomes over-betting, where the growth curve is steepest downward. Its drawdowns are also brutal even when correct. Most professionals use a half or a quarter of it.