Kelly Criterion
A formula for the bet or position size that maximizes long-term growth.
What is Kelly Criterion?
The Kelly criterion is a formula that calculates the fraction of capital to stake on a bet or trade in order to maximize the long-run growth rate of wealth. It uses the probability of winning and the payoff odds to find an optimal size, balancing growth against the risk of ruin. Many practitioners use a fraction of the full Kelly amount because the full result can produce large, volatile swings.