The Kelly criterion computes the bet size that maximizes long-run compound growth, given a strategy's win probability and its win/loss payoff ratio. The formula is f* = W − (1−W)/R, where W is win rate and R is the average win divided by the average loss.
In practice, full Kelly sizing is aggressive. It assumes the win-rate and payoff inputs are exactly right, and real strategies have uncertain, drifting edges. Most systematic traders run "fractional Kelly" (a quarter or half of what the formula suggests) specifically to survive the estimation error.
It's a useful mental model for why position sizing matters as much as signal quality. The same strategy can be a long-run winner or a bankroll-ending mistake purely based on how much is staked per trade, even where a desk uses a simpler rule day to day.
Educational content, not investment advice. zengtrade is paper-first and non-custodial.