Risk & position sizing
What is the Kelly Criterion and how do I apply it safely to position sizing parameters?
By Easy Money Scanner · Educational reference · Not investment advice
The short answer
The Kelly Criterion is a mathematical formula that calculates the optimal fraction of capital to allocate to a bet or trade based on estimated win probability and payoff ratio, maximizing long-term growth.
How it works
Full Kelly sizing is often considered too aggressive in practice because win-rate and payoff estimates are uncertain, so many practitioners apply a fractional Kelly (e.g., half or quarter) to reduce volatility.
An example
A trader with a 55% estimated win rate and 1:1 payoff ratio might use fractional Kelly to risk a smaller, more conservative percentage of capital than the full formula suggests.
Risk & limitations
Kelly sizing is highly sensitive to inaccurate win-rate or payoff estimates, and overestimating edge can lead to aggressive overbetting and significant drawdowns.
Examples are hypothetical, not trade recommendations. US contract and regulatory references do not automatically apply in Canada. Rules, margin requirements and broker policies can change; confirm them with the relevant authority and your broker.