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Kelly criterion

A formula for the bet size that maximizes long-run growth, given your edge and odds.

Risk & PsychologyAdvanced

Definition

The Kelly fraction depends on win probability and the ratio of average win to average loss. Full Kelly is very aggressive, so many traders use a fraction of it.

Formula

Kelly % = W - (1 - W) / R, where W is win rate and R is average win / average loss

Watch out for

It requires knowing your true win rate and payoff, which are only estimates. Overestimating them leads to over-betting.

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