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Kelly Criterion
Risk ManagementA mathematical formula for calculating the optimal fraction of capital to risk per trade based on win rate and payoff ratio. Full Kelly is often too aggressive, so traders use fractional Kelly (e.g., half Kelly) for a margin of safety.
Related Terms
Position Sizing
Determining how many shares or contracts to trade based on account size and risk per trade.
Expectancy
A measure of the average amount you can expect to win or lose per trade: (Win Rate x Avg Win) - (Loss Rate x Avg Loss).
Risk of Ruin
The probability of losing enough trading capital to make recovery practically impossible.