The World's Best Risk Strategy: Kelly Criterion

What is it?

The Kelly Criterion is a mathematical formula that calculates the optimal amount to risk on each bet/trade to maximize long-term growth while avoiding ruin.

Formula:

If you know your:

• Win Probability p

• Loss Probability q = 1 - p

• **Reward-to-Risk Ratio (b) = reward / risk

Then:

🎯 Let’s Apply it to a Case

• You have $100.

• The game has:

  • High Risk

  • Reward range: 1x to 100x

  • Let’s assume average reward = 10x

  • Let’s say win probability p = 0.1 (10%)

  • Then q = 0.9 , and b = 10

So you should risk only 1% of your capital on each bet.

Why? Because risking more (e.g., 10%, 20%) in a high-variance system will eventually blow your account. Kelly ensures long-term compounding with minimal risk of ruin.

Should You Keep Risk Constant?

Not always. Here's the logic:

Real-World Traders Use This:

• Edward Thorp (inventor of Kelly) turned blackjack profits into a hedge fund empire.

• Renaissance Technologies, Soros, Druckenmiller, and many quant funds use Kelly-like models.

• Crypto fund managers scale positions dynamically based on edge + volatility.

Conclusion: Strategy Summary