Question 1

What is the Kelly Criterion?

Accepted Answer

The Kelly Criterion is a mathematical formula developed by John L. Kelly Jr. at Bell Labs in 1956 for determining optimal bet size in repeated gambles with positive expectancy. In trading: Kelly % = Win Rate − (Loss Rate ÷ Win/Loss Ratio).

Question 2

Why do traders use fractional Kelly?

Accepted Answer

Full Kelly maximizes long-run growth mathematically but produces extreme volatility — drawdowns of 50%+ are common. Most professional traders use half-Kelly (50% of the Kelly output) or quarter-Kelly to reduce volatility while still benefiting from the framework.

Question 3

What inputs does the Kelly Criterion require?

Accepted Answer

You need your historical win rate (percentage of trades that are profitable) and your average win-to-loss ratio (average winning trade size divided by average losing trade size). These must come from your actual trading history — estimates produce unreliable results.

Question 4

Is the Kelly Criterion a guarantee of profits?

Accepted Answer

No. The Kelly Criterion assumes your historical win rate and R:R are accurate predictors of future performance, which is never guaranteed. It is a mathematical framework for position sizing only — not a profit guarantee, and not financial advice. Always apply it cautiously and use fractional Kelly.

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