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What is the Kelly criterion in trading?

The Kelly criterion is a mathematical formula that helps determine the optimal position size to maximize long-term growth. It considers win probability and risk-to-reward ratio. For example, if a strategy has a 60% win rate with a 1:1 payoff, the Kelly formula suggests risking 20% of capital per trade. While theoretically optimal, full Kelly can be too aggressive, leading to large drawdowns. Many traders use half-Kelly or a conservative version for practical risk management. The formula is valuable for system-based traders seeking to balance growth and risk.