If you've ever wondered why our bot recommends 8% of capital on one trade and 3% on another, it's not arbitrary. The answer is Kelly Criterion — a formula developed in 1956 by Bell Labs scientist John L. Kelly Jr. that calculates the mathematically optimal fraction of your capital to risk on any bet or trade.
Understanding Kelly Criterion won't just help you understand our alerts better — it will fundamentally change how you think about position sizing forever.
WHAT IS KELLY CRITERION?
Kelly Criterion answers one question: given a known edge and known payoff, what fraction of your bankroll should you bet to maximize long-term growth?
The formula is deceptively simple:
W = win rate (e.g. 0.58 for 58%)
R = payoff ratio (avg win / avg loss)
Example: W=0.58, R=3.51
K% = 0.58 - (0.42 / 3.51) = 0.58 - 0.12 = 0.46 = 46%
Wait — 46%? That seems insanely high. And it is. The full Kelly is theoretically optimal but practically dangerous because it assumes perfect knowledge of your win rate and payoff ratio, which you never actually have. This is why professionals use Half-Kelly.
WHY WE USE HALF-KELLY
Our bot uses Half-Kelly by default, which caps the position size at half of what full Kelly would suggest. In the example above, 46% full Kelly becomes 23% Half-Kelly — still aggressive but much more survivable when your edge estimate is slightly off.
Additionally, we apply a hard cap of 12% of capital per trade regardless of what Kelly says. Here's why:
A WORKED EXAMPLE (ILLUSTRATIVE)
Win rate: 58.3% (7 wins, 5 losses from 12 trades)
Avg win: $744 | Avg loss: $212
Payoff ratio R: 744 / 212 = 3.51x
Full Kelly: 0.583 - (0.417 / 3.51) = 0.583 - 0.119 = 46.4%
Half Kelly: 46.4% × 0.5 = 23.2%
Applied cap: 12% (our hard limit)
On a $53,000 account: $6,360 per trade
// Figures above are hypothetical and for illustration only — not actual trades or results.
The bot recalculates this after every closed trade. As your win rate and payoff ratio data builds, the sizing self-adjusts. Early on with limited data, the cap kicks in frequently. As the track record grows, Kelly's calculation converges with your true edge.
WHAT THIS MEANS FOR YOU AS A SUBSCRIBER
When you receive an alert that says "positionSizeUSD: $6,160 (11.5%)" — that number comes directly from this calculation applied to the bot's logged results. It's not arbitrary. It's the mathematically defensible answer to "how much should I risk on this setup?"
However — and this is critical — the sizing in our alerts is calibrated to our capital base, not yours. If you're trading a $25,000 account, you should scale our position sizes proportionally:
Your account: $25,000
Your position size: 0.115 × $25,000 = $2,875
The Kelly Number to Watch
Our weekly retrospective reports the Kelly fraction as a single number. When you see "Kelly: 3.0% risk/trade" in a status update, that's the Half-Kelly fraction currently applied. As the win rate grows and the payoff ratio holds, this number will increase — meaning the math says to size up.
Kelly Criterion maximizes long-term growth mathematically but does not guarantee profits on any individual trade. All position sizing suggestions from our software are informational outputs only. You are responsible for your own risk management decisions. Never risk capital you cannot afford to lose.
THE BOTTOM LINE
Kelly Criterion is the answer to the question most traders never think to ask systematically: not whether to trade, but how much. Getting the bet size right is arguably more important than picking the right trade. A great trade sized too large can blow up an account. A mediocre trade sized correctly is survivable.
The bot handles this math automatically and updates it with every closed trade. Your job is to execute the sizes as given — or scale them proportionally to your account — and let the math compound over time.
The story of the Kelly Criterion — from Bell Labs to Vegas to Wall Street. The most readable book on the subject and a fascinating look at how math beat the market.
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