Glossary
Kelly criterion
A formula for bet/position size that maximises long-run growth given your edge and odds. Useful for sizing, but it presumes you actually have a measurable edge.
In plain terms
Full Kelly is famously violent — it routinely recommends bets large enough to suffer 50%+ swings — so practitioners use 'fractional Kelly' (half or quarter) to trade some growth for survivability. Overestimating your edge while sizing at full Kelly is a recipe for ruin.
This project implements Kelly-based sizing in its risk module, but always under hard caps and a kill switch. The deeper lesson of our research is upstream of the formula: Kelly with an edge of zero says the correct position size is zero.
Related terms
Educational definitions only. Not investment advice.