Kelly Criterion Calculator

What Is the Kelly Criterion?

The Kelly Criterion is a mathematical formula developed by John Kelly at Bell Labs to determine the optimal bet size for maximizing long-term capital growth. In trading, it tells you what fraction of your account to risk per trade based on your edge.

Where b is the reward-risk ratio, p is win probability, and q = 1−p (loss probability). A 40% win rate with 1:2 R:R: f* = (2 × 0.4 − 0.6) / 2 = 0.10, meaning risk 10% of capital per trade.

Full Kelly vs Fractional Kelly

Full Kelly maximizes theoretical growth but produces extreme drawdowns. A 10% Kelly bet means 7 consecutive losses wipe out ~52% of your account. Most professional traders use half-Kelly (5% risk) or quarter-Kelly (2.5% risk), which dramatically reduces drawdown risk while still capturing most of the growth benefit.

Limitations in Forex Trading

Kelly assumes you know your exact win rate and reward-risk ratio — in reality, these are estimates from backtesting that drift over time. Your actual win rate may vary 5-10% from your estimate, which can flip a "profitable" Kelly bet into a losing one. Always use fractional Kelly and re-evaluate periodically as market conditions change.

Frequently Asked Questions

What is the Kelly Criterion in trading?

The Kelly Criterion is a formula that calculates the optimal fraction of capital to risk on each trade to maximize long-term growth. f* = (bp - q) / b, where b is the reward-risk ratio, p is win probability, and q = 1-p. The result tells you what percentage of capital to risk per trade.

Should I use full Kelly or half Kelly?

Most traders use half-Kelly or quarter-Kelly. Full Kelly is mathematically optimal but produces large drawdowns in practice. A 10% Kelly bet means a 50% drawdown requires only 7 consecutive losses — half-Kelly cuts that risk significantly while retaining most of the growth.

What does a negative Kelly fraction mean?

A negative Kelly fraction means your strategy has negative expectancy — don't trade it. It happens when your win rate is too low for your risk-reward ratio. You need at least a 33.3% win rate for a 1:2 R:R to have a positive expectation.

How accurate is the Kelly Criterion for forex?

Kelly assumes you know exact win rate and R:R, which are estimates in real trading. Most traders use it as a guideline rather than a precise rule. Combine Kelly with position sizing and risk management rules for practical use.