I spent years testing different strategies, obsessing over charts, and trying to find the perfect entry point. It took me a while to realize that it wasn’t just about picking the right trades—it was about knowing how much to risk on each trade. This is where the Kelly Criterion came into play and changed my entire approach.
You’ve probably heard the saying, “Don’t put all your eggs in one basket.” Well, Kelly Criterion takes that idea and puts some hard math behind it to tell you exactly how much you should risk to maximize your long-term growth. It’s not a guessing game anymore—it’s math, and math doesn’t lie.
What is Kelly Criterion?
The Kelly Criterion is a formula that helps you figure out the optimal size of your trades based on your past win rate and the average size of your wins compared to your losses. It’s designed to find the perfect balance between being aggressive enough to grow your account but cautious enough to protect it from major drawdowns.
F = W - (1 - W) / R
F is the fraction of your account you should risk.
W is your win rate (how often you win).
R is your risk/reward ratio (the average win relative to the average loss).
Let’s break it down.
How It Works
Let’s say you have a strategy that wins 60% of the time (W = 0.6), and your average win is 2x the size of your average loss (R = 2). Plugging those numbers into the formula, you’d get:
F = 0.6 - (1 - 0.6) / 2
F = 0.6 - 0.4 / 2
F = 0.6 - 0.2 = 0.4
So, according to Kelly, you should risk 40% of your account on each trade. Now, 40% might seem like a lot, but this is just the theoretical maximum for optimal growth.
The thing about using the full Kelly Criterion is that it’s aggressive. A 40% recommended risk allocation, for example, can be intense and lead to significant drawdowns, which is why many traders use half-Kelly, quarter-Kelly or other adjustments to manage risk. It’s a way to tone down the aggressiveness while still using the principle behind the formula.
Personally, I don’t just take Kelly at face value—I factor in both the sample size (which affects the confidence level) and my max allowed drawdown when deciding how much risk to take per trade. If the law of large numbers tells us we need a good sample size to align results with expectations, then I want to make sure my risk management accounts for that.
Let’s say, for instance, my confidence level is 95% (which is 0.95 in probability terms), and I don’t want to allow my account to draw down more than 10%. We can modify the Kelly Criterion like this:
𝑓 = ( ( 𝑊 − 𝐿 ) / 𝐵 )× confidence level × max allowed drawdown
Where:
𝑊 = W is your win probability,
𝐿 = L is your loss probability, and
𝐵 = B is your risk-reward ratio.
Let’s run this with actual numbers:
Suppose your win probability is 60% (0.6), loss probability is 40% (0.4), and your risk-reward ratio is still 2:1. Using the same approach where the confidence level is 95% and the max allowed drawdown is 10%, the calculation would look like this:
This gives us a risk percentage of 0.95% for each trade. So, according to this adjusted Kelly Criterion, based on a 60% win rate and your parameters, you should be risking just under 1% per trade.
This shows how adding the confidence level and max drawdown into the mix helps control your risk in a more conservative and tailored way, making the formula much more usable for practical trading instead of over-leveraging.
Why It’s Powerful
Kelly Criterion gives you a clear, mathematically backed way to avoid overbetting on any single trade, which is a common mistake traders make—especially when they’re chasing losses or getting overconfident after a win streak.
When I started applying this formula, I realized I had been risking too much on bad setups and too little on the good ones. I wasn’t optimizing my growth. Once I dialed in my risk based on the Kelly Criterion, I started seeing consistent growth that got me in the top 2% of traders on TradingView leap competition.
Kelly in Action
The first time I truly saw Kelly in action was during a winning streak. Before I understood this formula, I’d probably have gotten greedy and over-leveraged, risking blowing up my account. But with Kelly, I knew exactly how much to risk each time, so I could confidently scale up while still protecting my downside.
Likewise, during losing streaks, Kelly kept me grounded. Instead of trying to "make it back" quickly by betting more, the formula told me to stay consistent and let the odds play out over time. This discipline was key in staying profitable and avoiding big emotional trades.
Practical Use for Traders
You don’t have to be a math genius to use the Kelly Criterion. It’s about taking control of your risk in a structured way, rather than letting emotions guide your decisions. Whether you’re new to trading or have been in the game for years, this formula can be a game-changer if applied correctly.
Final Thoughts
At the end of the day, trading isn’t just about making the right calls—it’s about managing your risks wisely. The Kelly Criterion gives you a clear path to do just that. By understanding how much to risk based on your win rate and risk/reward ratio, you’re not just gambling—you’re playing a game with a serious edge.
So, whether you’re in a winning streak or facing some tough losses, keep your cool. Let the Kelly formula take care of your risk calculation.
If you haven’t started using the Kelly Criterion yet, now’s the time to dive in. Calculate your win rate, figure out your risk/reward ratio, and start applying it.
You’ll protect your account while setting yourself up for long-term profitability.
Trust me, this is the kind of math that can change the game for you.
Bonus: Custom Kelly Criterion Function in Pine Script
If you’re ready to take your trading to the next level, here’s a little bonus for you!
I’ve put together a custom Pine Script function that calculates the optimal risk percentage based on the Kelly Criterion.
You can easily enter the variables to fit your trading strategy.
Use this function to implement the Kelly Criterion directly into your trading setup. Adjust the inputs to see how your risk percentage changes based on your trading performance!
You’ve probably heard the saying, “Don’t put all your eggs in one basket.” Well, Kelly Criterion takes that idea and puts some hard math behind it to tell you exactly how much you should risk to maximize your long-term growth. It’s not a guessing game anymore—it’s math, and math doesn’t lie.
What is Kelly Criterion?
The Kelly Criterion is a formula that helps you figure out the optimal size of your trades based on your past win rate and the average size of your wins compared to your losses. It’s designed to find the perfect balance between being aggressive enough to grow your account but cautious enough to protect it from major drawdowns.
F = W - (1 - W) / R
F is the fraction of your account you should risk.
W is your win rate (how often you win).
R is your risk/reward ratio (the average win relative to the average loss).
Let’s break it down.
How It Works
Let’s say you have a strategy that wins 60% of the time (W = 0.6), and your average win is 2x the size of your average loss (R = 2). Plugging those numbers into the formula, you’d get:
F = 0.6 - (1 - 0.6) / 2
F = 0.6 - 0.4 / 2
F = 0.6 - 0.2 = 0.4
So, according to Kelly, you should risk 40% of your account on each trade. Now, 40% might seem like a lot, but this is just the theoretical maximum for optimal growth.
The thing about using the full Kelly Criterion is that it’s aggressive. A 40% recommended risk allocation, for example, can be intense and lead to significant drawdowns, which is why many traders use half-Kelly, quarter-Kelly or other adjustments to manage risk. It’s a way to tone down the aggressiveness while still using the principle behind the formula.
Personally, I don’t just take Kelly at face value—I factor in both the sample size (which affects the confidence level) and my max allowed drawdown when deciding how much risk to take per trade. If the law of large numbers tells us we need a good sample size to align results with expectations, then I want to make sure my risk management accounts for that.
Let’s say, for instance, my confidence level is 95% (which is 0.95 in probability terms), and I don’t want to allow my account to draw down more than 10%. We can modify the Kelly Criterion like this:
𝑓 = ( ( 𝑊 − 𝐿 ) / 𝐵 )× confidence level × max allowed drawdown
Where:
𝑊 = W is your win probability,
𝐿 = L is your loss probability, and
𝐵 = B is your risk-reward ratio.
Let’s run this with actual numbers:
Suppose your win probability is 60% (0.6), loss probability is 40% (0.4), and your risk-reward ratio is still 2:1. Using the same approach where the confidence level is 95% and the max allowed drawdown is 10%, the calculation would look like this:
This gives us a risk percentage of 0.95% for each trade. So, according to this adjusted Kelly Criterion, based on a 60% win rate and your parameters, you should be risking just under 1% per trade.
This shows how adding the confidence level and max drawdown into the mix helps control your risk in a more conservative and tailored way, making the formula much more usable for practical trading instead of over-leveraging.
Why It’s Powerful
Kelly Criterion gives you a clear, mathematically backed way to avoid overbetting on any single trade, which is a common mistake traders make—especially when they’re chasing losses or getting overconfident after a win streak.
When I started applying this formula, I realized I had been risking too much on bad setups and too little on the good ones. I wasn’t optimizing my growth. Once I dialed in my risk based on the Kelly Criterion, I started seeing consistent growth that got me in the top 2% of traders on TradingView leap competition.
Kelly in Action
The first time I truly saw Kelly in action was during a winning streak. Before I understood this formula, I’d probably have gotten greedy and over-leveraged, risking blowing up my account. But with Kelly, I knew exactly how much to risk each time, so I could confidently scale up while still protecting my downside.
Likewise, during losing streaks, Kelly kept me grounded. Instead of trying to "make it back" quickly by betting more, the formula told me to stay consistent and let the odds play out over time. This discipline was key in staying profitable and avoiding big emotional trades.
Practical Use for Traders
You don’t have to be a math genius to use the Kelly Criterion. It’s about taking control of your risk in a structured way, rather than letting emotions guide your decisions. Whether you’re new to trading or have been in the game for years, this formula can be a game-changer if applied correctly.
Final Thoughts
At the end of the day, trading isn’t just about making the right calls—it’s about managing your risks wisely. The Kelly Criterion gives you a clear path to do just that. By understanding how much to risk based on your win rate and risk/reward ratio, you’re not just gambling—you’re playing a game with a serious edge.
So, whether you’re in a winning streak or facing some tough losses, keep your cool. Let the Kelly formula take care of your risk calculation.
If you haven’t started using the Kelly Criterion yet, now’s the time to dive in. Calculate your win rate, figure out your risk/reward ratio, and start applying it.
You’ll protect your account while setting yourself up for long-term profitability.
Trust me, this is the kind of math that can change the game for you.
Bonus: Custom Kelly Criterion Function in Pine Script
If you’re ready to take your trading to the next level, here’s a little bonus for you!
I’ve put together a custom Pine Script function that calculates the optimal risk percentage based on the Kelly Criterion.
You can easily enter the variables to fit your trading strategy.
Use this function to implement the Kelly Criterion directly into your trading setup. Adjust the inputs to see how your risk percentage changes based on your trading performance!
🎅 Machine Learning Entry Model: fractalyst.net/
🎁 Discord Community: discord.gg/rdbDX9m3dx
🎁 Discord Community: discord.gg/rdbDX9m3dx
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