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Kelly Criterion : Not-so-common Techniques of Position Sizing

  • The Kelly Criterion is a mathematical formula that helps investors and gamblers calculate what percentage of their money they should allocate to each investment or bet.

  • The Kelly Criterion was created by John Kelly, a researcher at Bell Labs, who originally developed the formula to analyze long-distance telephone signal noise.

  • The percentage the Kelly equation produces represents the size of a position an investor should take, thereby helping with portfolio diversification and money management.

The winning probability is the ratio of the number of profitable trades to the total number of trades taken. The win/loss ratio is the ratio of the average gain on the trades that ended up in a profit to the average loss on the trades that gave a loss.



Profit/Loss ($)