Risk
Why full Kelly sizing is a warning
The size that maximizes long-run growth is large, volatile and very sensitive to a wrong win rate.
Arithmetic
True by construction. No market data is needed to know it.
Arithmetic plus a published caution about estimation error.
What it is
For a fixed payoff the Kelly fraction is win rate minus loss rate divided by reward. At 40% wins and 2:1 it is 10% of capital per trade.
What it suggests
A small error in the estimated win rate makes the recommendation far too large. The figure is a ceiling on what to consider, and it should not be used as a target.
How to check it
Compare the plan's risk per trade with the Kelly figure for the trader's own numbers and note how far below it the plan sits.
Common mistakes
- Sizing at full Kelly using a win rate estimated from a short record.
Sources
- MacLean, Thorp and Ziemba (2010), Good and bad properties of the Kelly criterion, Quantitative Finance 10(7) (citation and headline finding only)
Related lessons
Written in our own words. Education only, not financial advice.