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Put simply, the Kelly Criterion or Formula is a way to calculate how much of their assets a Forex trader should risk on any given trade in order to maximize the return.
It became notorious among equities traders because it was said that Warren Buffet uses a version of it when he’s picking his investments. Of course, since there is no such thing as a sure thing in trading, it has its detractors.
Sometimes it’s called the Kelly Strategy, but that can be giving it an undeserved level of usage.
At its core, it’s a calculation of risk relations. It is best suited as a risk and money management tool. It was originally designed for that purpose and became quite popular among gamblers in the middle of the last century.
What Is It?
The formula calculates the percentage of your account that you should invest (K%). That is equal to the historical win percentage (W) of your trading system minus the inverse of the strategy win ratio divided by the personal win/loss ratio (P).
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