The Kelly Criterion is a scientific gambling method using a formula for bet sizing that mathematically calculates the proper position size for placing a bet based on the odds. The Kelly bet size is calculated by optimizing the projected value of the wealth logarithm, which is equivalent to maximizing the expected geometric growth rate of the capital being wagered. The Kelly Criterion is a formula used to bet a preset fraction of an account. It can seem counterintuitive in real time.

  1. Kelly Criterion Formula
  2. Kelly Formula Excel
Kelly FormulaKelly

Kelly Criterion Formula

The Kelly criterion formula is: (bp-q)/b. Here: b is the decimal odds of an event -1; p is the probability of success; q is the probability of failure (which can be calculated by 1-p) Fractional Kelly Staking Calculator. One of the disadvantages of the Kelly strategy is that the punter may overestimate the edge, and this could turn out to be a. Avoid investing more than 20% to 25% of your money into any one stock or security, even if the Kelly formula tells you otherwise. The Bottom Line. Even though it worked for the gamblers doesn’t necessarily mean the Kelly criterion will work for you. While it’s good to use many different money management formulas, don’t rely on only one.

The Kelly formula is : Kelly % = W – (1-W)/R where:

Kelly Formula Excel

  • Kelly % = percentage of capital to be put into a single trade.
  • W = Historical winning percentage of a trading system.
  • R = Historical Average Win/Loss ratio.

Here are the statistics traders need to calculate the Kelly Criterion:

  1. You can use the data from your trading records or backtesting data for your system for calculating the Kelly Criterion.
  2. Your system’s winning probability is your “W”.
  3. Your system’s win/loss ratio is your “R”.
  4. These numbers are the input into Kelly’s equation above for calculating bet size.
  5. The Kelly percentage is what the equation returns.

For an even money bet, the Kelly criterion computes the wager size percentage by multiplying the percent chance to win by two, then subtracting one. So, for a bet with a 70% chance to win (or 0.7 probability), doubling 0.7 equates 1.4, from which you subtract 1, leaving 0.4 as your optimal wager size: 40% of available funds. – Wikipedia