What is the Kelly Criterion?

The simple yet powerful formula that tells you exactly how much to bet for maximum long-term growth

For Everyday Investors

Imagine you're playing a game where you win 60% of the time. How much should you bet each round to grow your money as fast as possible?

Bet too little? You miss out on potential gains. Bet too much? You risk losing everything on a bad streak.

The Kelly Criterion solves this perfectly. It's a mathematical formula that calculates the exact percentage of your money to risk on each investment for optimal growth.

Why It's Powerful

  • Maximizes long-term growth mathematically
  • Prevents catastrophic losses from over-betting
  • Used by Warren Buffett, Ed Thorp, and other legends
  • Works for stocks, crypto, sports betting, and any probabilistic investment

Real-World Example

If you have a 55% win rate and win/lose equal amounts, Kelly says bet 10% of your portfolio each time. This isn't a guess—it's the mathematically proven optimal amount for maximum long-term wealth.

The Mathematical Formula

f* = (bp - q) / b
f* = fraction of capital to wager
b = odds received on the wager (net odds)
p = probability of winning
q = probability of losing (1 - p)

Breaking It Down:

p (Win Rate): How often you win (e.g., 0.6 = 60%)
b (Win Multiple): How much you gain when you win
f* (Result): Optimal fraction of capital to bet

Quick Example Calculation

Given: 55% win rate, 1:1 payoff (win $1 for every $1 bet)

Formula: f* = (1×0.55 - 0.45) / 1 = 0.10

Result: Bet 10% of your capital each time

Interactive Monte Carlo Simulator

Test different scenarios and see how the Kelly Criterion performs over thousands of simulated trades. Adjust parameters and watch the magic happen.

Simulation Parameters

Optimal Kelly: 10.0%✅ Near optimal

Simulation Results

Run a simulation to see detailed results and performance metrics