Kelly Criterion Overview
Intro
Kelly gives a theoretically optimal fraction to bet given edge and winrate, but has high volatility in practice.
Step-by-step
- Estimate winrate and win/loss ratio from your strategy.
- Compute Kelly fraction: f = (bp - q)/b (conceptual).
- Use a fractional Kelly (e.g., half-Kelly) for practicality.
GOLD example
If your backtest on XAU/USD shows 55% wins and average win twice the average loss, Kelly suggests a certain fraction — but cap it.
Common mistakes
- Blindly using full Kelly without considering real-world frictions.