What’s it?
The Kelly Criterion is a mathematical method that calculates the optimum quantity to threat on every wager/commerce to maximise long-term progress whereas avoiding spoil.
Components:
If you already know your:
Then:
Kelly % = [ (b × p) – q ] / b
🎯 Let’s Apply it to a Case
You may have $100.
The sport has:
Excessive Danger
Reward vary: 1x to 100x
Let’s assume common reward = 10x
Let’s say win likelihood p = 0.1 (10%)
Then q = 0.9 , and b = 10
Kelly % = (10 × 0.1 − 0.9) / 10 = (1 − 0.9) / 10 = 0.1 / 10 = 0.01 = 1%
So it’s best to threat only one% of your capital on every wager.
Why? As a result of risking extra (e.g., 10%, 20%) in a high-variance system will ultimately blow your account. Kelly ensures long-term compounding with minimal threat of spoil.
Ought to You Preserve Danger Fixed?
Not at all times. This is the logic:
Actual-World Merchants Use This:
Edward Thorp (inventor of Kelly) turned blackjack income right into a hedge fund empire.
Renaissance Applied sciences, Soros, Druckenmiller, and plenty of quant funds use Kelly-like fashions.
Crypto fund managers scale positions dynamically primarily based on edge + volatility.
