The Kelly Criterion is a mathematical formula that tells you exactly how much capital to risk on each trade to maximize long-term growth. Originally designed for gambling, it's equally powerful for crypto and forex trading.
The Formula
Kelly % = W - (1 - W) / R
Where:
- W = Win rate (probability of winning)
- R = Win/loss ratio (average win ÷ average loss)
Real Examples
| Win Rate | Risk/Reward | Kelly % | Recommended Risk |
|---|---|---|---|
| 40% | 2:1 | 10% | 5% (half-Kelly) |
| 50% | 1.5:1 | 16.7% | 8.3% (half-Kelly) |
| 60% | 1:1 | 20% | 10% (half-Kelly) |
| 30% | 3:1 | 6.7% | 3.3% (half-Kelly) |
Why Half-Kelly Is Safer
Full Kelly can cause massive drawdowns. Most professional traders use half-Kelly or even quarter-Kelly:
Half-Kelly: Reduces volatility while keeping ~75% of the growth rate
In crypto, where 50%+ drawdowns happen regularly, half-Kelly is strongly recommended.
Practical Application
- Track at least 50 trades to calculate your stats
- Use a trading journal to measure win rate and average R:R
- Apply half-Kelly as your max risk per trade
- Never exceed 2% per trade regardless of what Kelly suggests
Caveats
- Kelly assumes your edge is consistent — review quarterly
- In correlated markets, reduce all position sizes
- Crypto volatility means smaller positions than formula suggests
Let math guide your risk, not emotion.
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