Kelly Formula
The Kelly criterion is formula that calculates the proportion of your balance to wager on a particular gamble. Learn more about the Kelly criterion.
A Kelly Strategy Calculator Introduction. J.L.Kelly, in his seminal paper A New Interpretation of Information Rate (Bell System Technical Journal, 35, 917-926 see below) asked the interesting question: how much of my bankroll should I stake on a bet if the odds are in my favor? This is the same question that a business owner, investor, or speculator has to ask themself: what proportion of my. The Kelly Formula was created to help calculate the optimal fraction of capital to allocate on a favorable bet. It doesn't mean that the formula is the be-all-end-all solution, but it.
How does the Kelly criterion calculator work?
By entering your bankroll, the odds and your estimated probability of winning, the Kelly Criterion calculator will tell you how much you should wager on a certain event to maximise your value and profit.
Use the Kelly Criterion Calculator here
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According to the Kelly criterion, you should place a wager of approximately 1.18% of your account balance on this selection.
Kelly Formula Pdf
After applying the fractional Kelly value of 0.04, this adjusts to a wager of approximately 1.71% of your account balance.
Based on your account balance of $1,000, this equates to a wager of $11.76.
The expected value of this wager is approximately $11.76*[(0.68)(0.60) + (-1)(0.4)] = $0.09, which equates to a 0.80% return on the funds wagered.
The Kelly criterion returned a value of -0.0061.
After applying the fractional Kelly value of 0.0, this adjusts to -0.0061 of your account balance.
Because this number is below 0 you should not back the selection at the available odds.
What is the Kelly Criterion?
The Kelly Criterion is a method by which you can used your assessed probability of an event occurring in conjunction with the odds for the event and your bankroll, to work out how much to wager on the event to maximise your value. By inputting the odds, the probability of the event occurring and your betting balance, you will be able to determine the amount you should wager on the event. The fractional Kelly betting input is a way to change how aggressive or conservative you are with your wagering (1 being the standard and moving towards 0 the more conservative you wish to be with your wagering). Ultimately, the Kelly Criterion calculator, if you are accurate with your assessed probability should increase your value and profit over a long-term period.
Bettors should always look for a mathematical edge rather than rely on their impulses. Learning how to use the Kelly Criterion, for example, is a great way for bettors to determine how much they should stake. Read on to find out.
Prior to placing a bet bettors should consider six important questions: who, what, when, where, why and how? But for this article, it is the how, as in how much to bet, we are interested in.
Popular staking method which suggests that stake should be proportional to the perceived edge.
Consider placing a bet on the English Premier League. We can adapt these questions accordingly:
- Who to bet on? Manchester United
- What to bet on? Top 4 finish
- When to bet on? Now
- Where to bet on? Pinnacle tend to offer the best odds
- Why to bet on? They seem to be under-priced
- How much? How much to bet on this outcome?
Most articles focus on the first five questions, typically using mathematical or statistical justifications on answering ‘why’ - such as the article on how to use Monte Carlo methods.
In making financial decisions, the key issue is not only finding the adequate financial products to invest in but also deciding how to subdivide one’s portfolio. Similarly, an important question for a bettor, is how much to wager?
Many papers recommend using the Kelly Criterion or a derivative of it - such as my 2013 paper appearing in the The Journal of Gambling Business and Economics. In essence, the Kelly Criterion calculates the proportion of your own funds to bet on an outcome whose odds are higher than expected, so that your own funds grow exponentially.
B = the Decimal odds -1
P = the probability of success
Q = the probability of failure (i.e. 1-p)
Kelly Formula Stocks
Using a coin as an example of Kelly Criterion staking
For example, consider you are betting on a coin to land on heads at 2.00. However, the coin is biased and has a 52% chance of ending up on heads.
In this case:
Kelly Formula Book
P= 0.52
Q = 1-0.52 = 0.48
B = 2-1 = 1.
This works out at: (0.52x1 – 0.48) / 1 = 0.04
Therefore the Kelly Criterion would recommend you bet 4%. A positive percentage implies an edge in favour of your bankroll, so your funds grow exponentially. You can also test the criterion for different values in this online sheet by using the code below.
Ultimately the Kelly Criterion offers a distinct advantage over other staking methods such as Fibonacci and Arbitrage methods as there is a lower risk. However, it does require precise calculation of the likelihood of an event outcome, and discipline of this method will not provide explosive growth of your bankroll.
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