How to Use Kelly Calculator 💡
- 1. Enter your Win Rate. How often does this strategy win historically?
- 2. Input the Odds (Decimal). If you win, what is the total payout? (e.g. 2.0 for 1:1 payoff, 3.0 for 2:1 profit).
- 3. Choose your Kelly Fraction. Full Kelly is optimal but volatile. Half or Quarter Kelly is safer.
- 4. Check the Optimal Position Size to maximize growth while avoiding ruin.
What is Kelly Criterion?
Developed by John Kelly at Bell Labs in 1956, this formula calculates the specific percentage of your bankroll to bet in order to maximize long-term geometric growth while avoiding bankruptcy.
Legendary investors like Warren Buffett and Edward Thorp have used variations of this for asset allocation. The key insight is: "Even if you have an edge, betting everything will eventually lead to ruin."
Simple Example (Coin Toss) 🪙
Imagine a coin toss where you win double your bet if it's Heads, and lose your bet if it's Tails. You have a 60% win rate. How much should you bet?
- Bet 10%? Too safe, your wealth grows slowly.
- Bet 100%? One loss means Bankruptcy (0).
- The Kelly answer is 20%. This is the mathematical sweet spot to maximize growth without going broke.
The Formula
The general form used for simple bets is:
f = (bp - q) / b
* Where f = fraction to bet, b = net odds (Decimal Odds - 1), p = probability of winning, q = probability of losing (1-p).