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Kelly Criterion in Trading

The Kelly criterion estimates the fraction of capital that maximizes expected logarithmic growth when win probability and payoff are known and stable. For a simplified trading setup: f = (b × p − q) / b* where b is the reward-to-risk ratio, p is the probability of winning, and q = 1 − p. For a 50% win rate with a 2:1 reward-to-risk ratio, full Kelly gives 25%. That fraction is mathematically growth-optimal only within the assumptions of the model. Real trading introduces estimation error, non-stationarity, slippage, and changing conditions. Fractional Kelly is therefore often considered when applying the concept in practice.