What is it?
The Kelly Criterion is a mathematical formula that calculates the optimal amount to risk on each bet/trade to maximize long-term growth while avoiding ruin.
Formula:
If you know your:
Then:
Kelly % = [ (b × p) – q ] / b
Let’s Apply it to a Case
You have $100.
The game has:
High Risk
Reward range: 1x to 100x
Let’s assume average reward = 10x
Let’s say win probability p = 0.1 (10%)
Then q = 0.9 , and b = 10
Kelly % = (10 × 0.1 − 0.9) / 10 = (1 − 0.9) / 10 = 0.1 / 10 = 0.01 = 1%
So you should risk only 1% of your capital on each bet.
Why? Because risking more (e.g., 10%, 20%) in a high-variance system will eventually blow your account. Kelly ensures long-term compounding with minimal risk of ruin.
Should You Keep Risk Constant?
Not always. Here’s the logic:
Real-World Traders Use This:
Edward Thorp (inventor of Kelly) turned blackjack profits into a hedge fund empire.
Renaissance Technologies, Soros, Druckenmiller, and many quant funds use Kelly-like models.
Crypto fund managers scale positions dynamically based on edge + volatility.
