Kelly Criterion Calculator

Position Sizing with Purpose: What Your Kelly Criterion Results Reveal

After using the Kelly Criterion calculator, you've been given a specific percentage to risk on each trade—your “Optimal Kelly Percentage”—along with recommended position sizes, projected growth rates, and other vital metrics. These aren’t just abstract numbers; they represent a data-driven foundation for smarter risk-taking. Here's how to make sense of what the calculator just told you and how to apply it effectively in your trading decisions.

Key Takeaways from Your Kelly Criterion Output

• Optimal Kelly Percentage: This is the maximum theoretical fraction of your account to risk per trade to maximize long-term growth. If your result was 13.8%, that’s your full-Kelly figure—before any risk adjustments.
• Recommended Position Size: Based on a more conservative “half-Kelly” approach, this value suggests how much capital to allocate per trade. For example, a $690 position from a $10,000 account reflects 0.5 of the optimal Kelly.
• Expected Growth Rate: Expressed as a percentage per trade, this shows your compounded return potential at the recommended sizing level. The higher this number (with low risk), the stronger your edge.
• Probability of Ruin: Often overlooked, this shows how likely it is to blow up your account over time. If this reads under 0.1%, your risk exposure is under control—mathematically speaking.
• Max Drawdown: Even if your strategy is sound, drawdowns are inevitable. This figure reflects your likely worst-case scenario based on inputs like volatility and correlation.
• Sharpe Ratio: A higher Sharpe suggests better risk-adjusted performance. Anything above 1 is generally solid; 1.85, for instance, signals favorable reward for each unit of risk.

Signals to Watch in Your Kelly Output

• If Your Kelly Percentage Is High (e.g., >20%): You likely have a strong edge—but the market is rarely stable enough to support risking that much consistently. Stick with fractional sizing (e.g., 0.25x or 0.5x Kelly).
• If Your Kelly Percentage Is Near Zero: This means your trading edge is minimal or nonexistent. It’s a prompt to re-examine your strategy, win rate, or reward-to-risk profile.
• Unexpectedly High Drawdown: Indicates your inputs—especially volatility or correlation—may be elevating risk. Reducing your Kelly fraction can help smooth the ride.

Risk Considerations Before You Place That Trade

• Kelly Isn't Infallible: It assumes you have accurate, stable win rates and risk/reward figures. In reality, markets fluctuate and past performance is no guarantee of future results.
• Volatility Can Skew Everything: A market shock or unexpected event can erase the statistical edge you're relying on. Be wary of high-Kelly allocations during turbulent times.
• Psychological Stress Is Real: Even if math says you can risk 13% per trade, most traders can’t stomach a string of losses at that level. Emotional fatigue often leads to poor decisions.
• Correlated Trades Compound Risk: If multiple positions are positively correlated (e.g., all tied to USD strength), the effective risk is higher than it appears. The calculator adjusts for this—but only if you input correlation correctly.

Practical Tips for Using Your Results

• Start Small: If you're new to position sizing via Kelly, begin with 0.25x or 0.5x Kelly to get a feel for it. Full Kelly is rarely used outside of controlled simulations.
• Reassess Monthly: Win rate and win/loss ratios evolve. Update your inputs regularly to ensure your sizing adapts to your current performance.
• Layer in Stop-Loss Controls: Kelly assumes average loss size is contained. In practice, hard stops (or mental thresholds) protect against oversized losses.
• Cap Position Sizes: Even if the Kelly model suggests risking $3,000 on a trade, set a personal or regulatory ceiling (e.g., never more than $1,000 per position).
• Track Metrics Over Time: Use a trading journal to compare your actual growth vs. projected Kelly-based growth. The insights can fine-tune your future risk models.

Next Steps with Your Kelly Criterion Analysis

The Kelly Criterion provides a powerful lens through which to view your trading strategy—not just in terms of profitability, but in sustainable growth. If your calculator results point to a strong edge, great—but tread carefully. Use fractional sizing, remain vigilant about your performance metrics, and adjust for volatility and correlation. If the results suggest minimal or zero edge, consider it a helpful signal to step back, reassess, and test new strategies before risking more capital.

Ultimately, the Kelly Criterion doesn’t just tell you how much to trade—it tells you whether your trading system is worth scaling at all.