The Kelly criterion maximises logarithmic capital growth under ideal conditions. In real trading it is useful as a reference, not as an absolute command.
Who this is for
- Anyone who wants to tie size to measurable statistical data.
- Anyone building systems with stable win rate and payoff.
- Anyone who distinguishes theory from practical application.
Prerequisites — Complete Silver path first (min.: Max daily risk, Max drawdown, Robustness, Backtest). Foundation: Bronze path.
In plain terms — If you have a statistical advantage, Kelly estimates how much capital to risk. In practice, full Kelly is often too aggressive.
Correct use in the risk module
Estimate edge, success probability, and payoff ratio with a robust sample. Calculate Kelly as a theoretical baseline and test sensitivity to parameters. Apply maximum daily and weekly risk constraints. Treat the result as an upper bound, not a default size. When uncertainty is high, use a conservative fraction.
Example — Strategy with 52% win rate and 1.6 payoff. Theoretical Kelly suggests a size above your operational limit. You decide to use half or a third of the value to reduce drawdown.
Card
- Goal: link position sizing to statistical edge.
- Key inputs: win rate, payoff ratio, model stability.
- Warning sign: estimates based on samples that are too small.
- Typical mistake: applying full Kelly in unstable markets.
- Practical action: use Kelly as a benchmark, not an obligation.
Gold path — Module: Advanced risk control. Part of Gold path.