The Kelly criterion is a formula for the position size that maximizes long-run growth given your edge and reward-to-risk. Full Kelly is too aggressive in practice because small errors in estimating win probability can ruin an account, so traders use a fraction (half Kelly or less) and cap each trade at a few percent of capital.
This term belongs to Risk & statistics. See how it fits the bigger picture in The Money, part of the free DEGEN ACADEMY — or watch it play out on the live terminal.
FAQ
What is Kelly criterion?
The Kelly criterion is a formula for the position size that maximizes long-run growth given your edge and reward-to-risk. Full Kelly is too aggressive in practice because small errors in estimating win probability can ruin an account, so traders use a fraction (half Kelly or less) and cap each trade at a few percent of capital.