Quoted - godswillfx
Kelly Criterion in Forex
The Kelly Criterion formula is:
f = (bp - q) / b
Where:
- f = fraction of your account to risk per trade
- b = net odds (reward-to-risk ratio, e.g., 1.5 for a 1:1.5 RR)
- p = probability of a winning trade
- q = probability of a losing trade (1 - p)
Forex Example
Say your strategy has:
- 60% win rate (p = 0.60, q = 0.40)
- 1:2 risk-to-reward ratio (b = 2)
f = (2 × 0.60 - 0.40) / 2 = (1.20 - 0.40) / 2 = 0.80 / 2 = 0.40
This says risk 40% of your account per trade which is extremely aggressive in Forex.
Practical Tip: Use Half-Kelly
Most professional traders use Half-Kelly (f / 2), so in the example above that would be 20%. Even that's high for Forex. Here's why:
- The formula assumes your win rate and RR estimates are perfectly accurate they rarely are in live markets
- Forex has inherent volatility, slippage, and spread costs not captured in the formula
- Full Kelly can cause catastrophic drawdowns with even a short losing streak
A common approach is to use Kelly to identify the ceiling of position sizing, then scale down to 10–25% of the Kelly output for day-to-day trading.
In short, Kelly is a great theoretical guide for position sizing, but in Forex it's best treated as a risk ceiling, not a rule.
