In trading, Kelly is shorthand for the Kelly criterion: a theoretical rule that chooses a capital fraction to maximize expected logarithmic growth over the long run under a specified distribution and conditions.
How the term is used
“Kelly size” means the fraction produced by the model from estimated probabilities and payoffs. The commonly quoted binary formula is a special case; portfolios, multiple outcomes, costs, and constraints require a formulation consistent with the actual problem.
Technical distinction
Kelly does not maximize the profit of the next trade or minimize drawdown. The criterion assumes probabilities and returns are adequately described, so estimation errors can make the size too large. Fractional Kelly reduces exposure but does not by itself guarantee a loss limit.
Sources
- J. L. Kelly Jr., A New Interpretation of Information Rate, Bell System Technical Journal, 1956 — The original work connecting information with the maximum exponential growth rate of capital.
- Edward O. Thorp, The Kelly Criterion and the Stock Market, 1992 — A recognized derivation and application of the criterion to markets.