Fractional Kelly is the operational version of the Kelly criterion in real contexts. It reduces aggressiveness while keeping the link to statistical edge.
Who this is for
- Anyone using quantitative models but wanting sustainable risk.
- Anyone with external limits on volatility or drawdown.
- Anyone operating in non-stationary markets.
Prerequisites — Complete silver-path first (min.: max-daily-risk, max-drawdown, robustness, backtest). Foundation: bronze-path.
In plain terms — Take Kelly's theoretical size and use only part of it. You grow more slowly, but with a higher chance of staying in the game.
Practical rules
Choose the fraction based on data quality and drawdown tolerance. Common values are ½, ⅓, or ¼ Kelly. Pair the fraction with hard limits on daily and weekly loss. Recalibrate periodically when win rate and payoff change. Keep clear documentation of the assumptions used in the calculation.
Example — Theoretical Kelly suggests 6% risk per trade. With a one-third fractional approach you apply a 2% theoretical maximum. After out-of-sample testing you choose 1.5% to match your risk curve.
Card
- Goal: balance growth and capital survival.
- Key inputs: theoretical Kelly, equity volatility, operational limits.
- Warning sign: drawdown above expected despite the rule.
- Typical mistake: changing the fraction based on momentary emotions.
- Practical action: fix the fraction in the quarterly playbook.
Gold path — Module: Advanced risk control. Part of gold-path.