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kelly-criterion

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Kelly criterion optimal sizing with fractional variants, edge estimation, and practical application for crypto trading

skills/agiprolabs__claude-trading-skills/skills/kelly-criterion/SKILL.md

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# Kelly Criterion — Optimal Bet Sizing

The Kelly criterion is the mathematically optimal bet size that maximizes long-term geometric growth of capital. Developed by John Kelly at Bell Labs in 1956, it answers a precise question: given a known edge, what fraction of your bankroll should you risk to maximize the compounding rate?

**Core insight**: Betting too small leaves growth on the table. Betting too large increases ruin risk and actually *reduces* long-term growth. Kelly finds the exact optimum between these extremes.

**Practical insight**: You should almost never use full Kelly. Estimation error in your edge means full Kelly will overbets in practice. Use fractional Kelly (0.25x to 0.5x) for real trading.

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## The Kelly Formula

For a binary outcome (win or lose):