Stake strategiesUpdated 3 min readBy the FXNOD team
Kelly criterion: how much of your account to stake
The Kelly criterion is a formula for the share of your account to stake on a bet that has a positive edge. It equals the win probability times the payout ratio, minus the loss probability, all divided by the payout ratio. If the result is zero or negative there is no edge, and the correct stake is nothing.
The formula
Kelly fraction equals b times p, minus q, divided by b. Here p is the chance of winning, q is the chance of losing, which is 1 minus p, and b is the profit per unit staked on a win. The answer is the fraction of the account to stake.
Worked examples
| Win chance | Profit per 1 staked | Kelly fraction | Meaning |
|---|---|---|---|
| 50% | 0.95 | -2.6% | No edge: do not bet |
| 52% | 0.95 | 1.5% | A small edge: stake 1.5% of the account |
| 55% | 0.95 | 7.6% | A clear edge |
| 55%, at even money | 1.00 | 10% | The same win chance with a full payout |
| 90% | 0.10 | -10% | A high win rate with no edge |
Take the third row: 0.95 times 0.55 is 0.5225, minus 0.45 is 0.0725, divided by 0.95 is 0.076. The first and last rows are the important ones. An even-chance contract paying less than double, and a 90% contract paying a tenth of the stake, both give a negative answer.
What Kelly really tells a trader
- How much to stake depends on the size of the edge, not on recent results.
- Without an edge, the best stake is zero. No staking system rescues a negative-expectation bet.
- Staking more than Kelly reduces long-term growth, and staking double Kelly or more leads towards ruin even with an edge.
Why nobody should use full Kelly
The formula assumes you know the true win probability. You never do: you have an estimate from a sample, and estimates are usually optimistic. Overestimating the edge means overbetting, and full Kelly is already a rough ride, with deep drawdowns. Practitioners use half Kelly or a quarter, giving up a little growth for much smaller swings.
Using it
Measure the win rate over hundreds of trades
With a flat stake, on demo or small real size.
Take the payout from your results
Average win divided by average loss.
Calculate the fraction
If it is negative, stop. The strategy has no edge.
Use a quarter to a half of it
And cap it at a level you can live with, such as 2%.
On random markets
On a synthetic index, where each outcome has a known chance and the payout is set below the fair value, the Kelly fraction is negative for every contract. That is the arithmetic behind the advice to keep stakes small and treat such trading as a cost, not an income.
Questions people ask
- What is the Kelly criterion in simple terms?
- A formula that says how much of your money to risk on a bet with an advantage: more when the edge is larger, nothing when there is none.
- What is half Kelly?
- Staking half the amount the formula gives. It keeps most of the growth and greatly reduces drawdowns and the cost of misjudging the edge.
- What does a negative Kelly result mean?
- That the bet loses on average. The formula's recommendation is not to place it.
See the stakes before you start
Bot Forge shows the stakes of a losing streak before a bot runs, will not start without a stop loss, and caps the largest stake. Try any stake setting on your Deriv demo account.
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