Kelly Criterion
Order Flow Analysis glossary · Order Flow Trading
Definition
A position-sizing formula that returns the fraction of capital to risk per trade given an edge: f^* = W - (1-W)/(b), where W is win probability and b = R_win/R_loss is the reward-to-risk ratio. Pure Kelly maximises long-run growth but is volatile; practitioners use half-Kelly (f^*/2) to cut drawdown roughly in half at the cost of a small growth-rate reduction. Inputs must come from a credible sample of historical results, not optimism.
Kelly Criterion in plain English
The Kelly Criterion answers one nagging question: "How much of my money should I actually put on any single bet?" Bet too little and you barely grow; bet too much and one bad streak wipes you out. The formula f^* = W - (1-W)/(b) takes your win probability W and your reward-to-risk ratio b (how many dollars you win when right versus lose when wrong) and spits out the exact fraction of your bankroll that grows your money fastest over the long run. Because pure Kelly swings wildly, most pros use "half-Kelly" (just f^*/2), which smooths out the scary dips a lot while giving up only a little growth — like driving fast but not flooring it. The catch: it only works if W and b come from real, honest past results, not from hoping you're better than you are.
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