Kelly Criterion

Understand the Kelly Criterion for optimal position sizing in trading. Maximize long-term capital growth by calculating the perfect risk per trade.

Published · Updated · Methodology: Mixed

Part of: Risk Management

  • Methodology: Mixed
  • Content type: educational

Source video

Decoded from: ¿Cuánto arriesgar 💰 , según el criterio de Kelly 😲? Gestión Monetaria 📈 by Matemática Del Trading — watch the original

Strategy overview

The Kelly Criterion is a formula that turns an estimated edge into a position size, answering how much of a bankroll to commit per trade so that long-run compounded growth is maximised. What makes this entry unusual inside a strategy catalogue is that it generates no trades at all: it carries no timeframe, no indicator and no market because it is not a way of deciding what to buy — it is arithmetic applied after that decision has already been made. The blank fields and the 'Mixed' classification are the correct signature for a sizing rule, which attaches to whatever system produces the statistics rather than competing with it.

The source is a Spanish-language clip from Matemática Del Trading, a channel whose name announces its treatment, and the video is filed explicitly under money management — '¿Cuánto arriesgar, según el criterio de Kelly? Gestión Monetaria'. The title is phrased as a question rather than a claim, the format of a clip that exists to deliver one answer rather than teach a system. The interesting part of any such answer is what it depends on. Kelly takes two inputs — the probability of winning and the ratio of the average win to the average loss — and both arrive as estimates drawn from a finite sample of past trades. The penalty for getting them wrong is not symmetric: underestimating your edge only slows compounding, while overestimating it pushes size past the growth optimum, where the same curve that rewarded increases starts punishing them and exposure to drawdowns deep enough to be unrecoverable grows quickly. That asymmetry, not the algebra, is why the common practical response is to commit only a fraction of what the formula returns.

No rules were extracted for this entry, and that is structurally correct rather than a gap: a sizing formula has no entry trigger, no exit and no filter to extract — it rescales trades that some other strategy already produced. The clip also carries no chapter markers, so whatever derivation it walks through is unindexed and has to be followed linearly. Read it as the layer sitting underneath the rest of the catalogue: a question every mechanical strategy eventually has to answer, and one whose answer is only as trustworthy as the statistics fed into it.

Topics

kelly criterion · risk management strategy · position sizing · trading strategy · money management · trading psychology · quant trading · optimal f · capital allocation · investment strategy

Frequently asked questions

What is the Kelly Criterion in trading?

It is a position-sizing formula that converts an estimated edge — win probability and the ratio of average win to average loss — into the fraction of capital to risk per trade, with the goal of maximising long-run compounded growth rather than the outcome of any single trade.

Does the Kelly Criterion tell you when to enter or exit a trade?

No. It is money management, not a signal method: it decides size, not direction or timing. That is why this entry has no timeframe, indicator or market attached — it can be applied on top of almost any strategy.

Why do traders use only a fraction of what the Kelly formula returns?

Because the formula's inputs are estimates from a limited sample, and the cost of error runs one way. Betting under the optimum slows growth; betting over it degrades growth and deepens drawdowns much faster, so committing a fraction of the full figure buys tolerance for estimation error.

Where do the win rate and payoff ratio for Kelly come from?

From the track record of a specific strategy, usually a backtest or a sample of live trades — the formula cannot supply them. Strategy Decoder extracts the structure of strategies from video sources so you can test them on TradingView and produce the statistics a sizing rule like this one needs.

About this strategy page

This trading strategy was decoded by Strategy Decoder's AI from a public YouTube trading video and turned into a structured, reviewable specification. In the interactive app this page shows the full entry and exit logic, risk management settings, the indicators involved with their parameters, AlgoWizard-compatible logic and a Pine Script export ready for TradingView backtesting — plus an automated backtest verdict when one has been computed for this strategy.

Strategy Decoder catalogs 2,229 decoded strategies. Each one is extracted with confidence scoring, cross-linked to the indicators it uses, and kept up to date as new videos are processed daily. Load this page with JavaScript enabled to use the interactive tools, or start from the strategy explorer to filter by methodology, market and timeframe.

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