Kelly criterion
The Kelly criterion computes the fraction of capital that maximises long-run geometric growth of an account, from win rate and the win/loss ratio. Run this calculation now: how to measure your own performance
The formula and an example
f = p − (1 − p) ÷ b, where p is win probability and b the ratio of average win to average loss. With a 55% win rate and b = 2: f = 0.55 − 0.45 ÷ 2 = 0.325. That is 32.5% of capital per trade — a number any experienced trader recognises as practical suicide.
Kelly assumes known, stable probabilities, and in markets they are estimated from the past. A small error in estimating p multiplies real risk, and the Kelly curve is brutally asymmetric: betting above optimal destroys faster than betting below delays.
Fractional Kelly
The realistic use is fractional Kelly: a half, a quarter or a tenth of the computed value. Half Kelly delivers roughly 75% of the growth at half the volatility, and it is the default for anyone trading money they need.
On a prop firm account, the drawdown limit outranks Kelly: if the computed fraction allows a losing streak that breaches the daily limit, it is wrong by definition, however good the mathematics.