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Kelly criterion

John Kelly published it in 1956 at Bell Labs. For a simple bet: Kelly fraction = edge ÷ odds. Edward Thorp later applied it to blackjack and markets.

The catch: in trading you never know your true odds. Full Kelly also gives wild swings. MacLean, Thorp and Ziemba describe how full Kelly can lead to big drawdownsHow far your account fell from its peak. (deep dips in your account). Many practitioners use a fraction, like half Kelly. They give up some growth for smoother results. Busseti, Ryu and Boyd show how to add a drawdown limit to Kelly.

Practical takeaway: Kelly is a useful idea about over-betting, not a magic size calculator.

Related

• Risk of ruin
• Position sizing

Sources & studies

1. Kelly (1956), A New Interpretation of Information Rate (PDF)
2. Thorp, The Kelly Criterion in Blackjack, Sports Betting and the Stock Market (PDF)
3. MacLean, Thorp & Ziemba, Good and bad properties of the Kelly criterion (PDF)
4. Busseti, Ryu & Boyd, Risk-Constrained Kelly Gambling (Stanford PDF)

Risk and position sizingRisk of ruinPosition sizing

Last checked: 2026-11-04 · Educational, not financial advice.

Education only, not financial advice. No signals. Backtests are hypothetical: real trading can be worse. Past results don't predict future results.