Kelly criterion
A formula for the fraction of capital that maximises long-run growth, given a known edge.
In plain English
Its output is only as good as its inputs, and a trader’s win rate and payoff are estimates, not known values. Full Kelly sizing produces very deep drawdowns even when the inputs are right, which is why it is usually discussed as an upper limit rather than a target.
Example
With a 50% win rate and 2:1 payoff, the formula gives 0.5 − 0.5 ÷ 2 = 25% — far more than most risk frameworks would ever allow per trade.