First of all you must understand what is position sizing and it refers to the number of units invested in a particular security by an investor or trader. An investor's account size and risk tolerance should be taken into account when determining appropriate position sizing.
The Kelly criterion is a mathematical formula relating to the long-term growth of capital developed by John L. Kelly Jr. while working at AT&T's Bell Laboratories. It is used to determine how much to invest in a given asset, in order to maximize wealth growth over time.
Let´s look at the formula for Kelly Criterion:
Kelly % = W - [(1-W)/R]
It calculates the percentage of your account that you should risk (K%). It is equal to the historical win percentage of your trading strategy minus the inverse of the strategy win ratio divided by your profit/loss ratio.
The percentage you get from that equation is the position you should be taking. For example, if you get 0.05, it means you should risk 5 % of your capital per trade.
Let´s look at the formula for Kelly Criterion:
Kelly % = W - [(1-W)/R]
It calculates the percentage of your account that you should risk (K%). It is equal to the historical win percentage of your trading strategy minus the inverse of the strategy win ratio divided by your profit/loss ratio.
The percentage you get from that equation is the position you should be taking. For example, if you get 0.05, it means you should risk 5 % of your capital per trade.
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