Kelly Criterion Sizing
Discover the mathematically optimal percentage of your account to risk on every trade to maximize long-term compounding while avoiding the risk of ruin.
Professional traders rarely trade "Full Kelly" (100%). Half-Kelly (50%) or Quarter-Kelly (25%) are standard to reduce variance and drawdowns.
Recommended Risk Per Trade
What is the Kelly Criterion?
The Kelly Criterion is a mathematical formula originally developed by J.L. Kelly Jr. in 1956 while working at Bell Labs. It was designed to determine the optimal size of a series of bets in order to maximize the logarithm of wealth. In trading, it tells you exactly what percentage of your account balance you should risk on each trade to maximize compounding returns over the long term.
Why Prop Traders Use "Fractional Kelly"
While the formula spits out the mathematically perfect number (known as "Full Kelly"), trading at Full Kelly guarantees massive volatility. If you hit a statistically normal losing streak while risking Full Kelly, your account will experience severe drawdowns.
Proprietary trading firms (like FTMO or FundedNext) have strict maximum drawdown rules (usually 10%). Because of this, prop firm traders almost universally employ Fractional Kelly.
- Half-Kelly (50%): Reduces the optimal risk by half. It significantly reduces volatility and drawdowns while still capturing about 75% of the theoretical compounding growth.
- Quarter-Kelly (25%): An even safer approach, perfect for prop firm evaluations where survival is more important than massive immediate returns.