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Kelly Criterion & Optimal Position Sizing Calculator Formula Breakdown
Expected statistical probability of the investment thesis achieving its target upside.
Upside payoff relative to downside stop-loss risk (e.g. 2.0 = $2 upside for every $1 downside risk).
Theoretical percentage of total bankroll to allocate to maximize long-term logarithmic wealth compounding.
Institutional practitioner standard (Kelly / 2) that slashes portfolio volatility by 50% while retaining 75% of return.
How to Calculate Kelly Criterion Step-by-Step
Input investment win probability (derived from historical win rate, fundamental predictability, or analyst consensus).
Set target upside percentage and maximum downside risk to establish the win/loss payoff ratio (R).
Apply the Kelly formula: f* = W - (1 - W) / R.
Calculate Full Kelly %, Half-Kelly %, and Quarter-Kelly % tiers.
Convert allocation percentage into exact dollar size and share quantity based on total portfolio value.
How to Interpret the Result
Frequently Asked Questions
What is the Kelly Criterion in investing?
Formulated in 1956 by Bell Labs scientist J.L. Kelly Jr. and famously utilized by Warren Buffett, Ed Thorp, and Jim Simons, the Kelly Criterion determines the exact bet size that maximizes the long-term compound growth rate of capital.
Why do professional investors use Half-Kelly instead of Full Kelly?
Full Kelly assumes perfect knowledge of probability and payoff. Because market probabilities are estimates, Full Kelly causes violent portfolio drawdowns. Half-Kelly provides 75% of the growth rate with only 50% of the volatility.
What should I do if the Kelly formula gives 0% or negative?
A negative Kelly result indicates that the downside risk multiplied by failure probability exceeds expected upside—meaning entering the trade has negative expected value.
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