> ## Documentation Index
> Fetch the complete documentation index at: https://www.questforedge.io/llms.txt
> Use this file to discover all available pages before exploring further.

# Kelly Criterion in Trading

> How the Kelly criterion estimates a growth-optimal betting fraction under idealized assumptions.

# 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.