Fractional Kelly

Fractional Kelly means risking only a portion of what the full Kelly criterion suggests, such as half Kelly or quarter Kelly. It is how most professional traders and gamblers who use Kelly actually apply it. The reason is simple: full Kelly maximises long term growth only if your edge estimate is exactly right, and even then it produces stomach churning drawdowns. A fraction gives up a little growth in exchange for much more safety.

The trade off#

A useful result from the mathematics of Kelly betting: betting half the Kelly fraction gives roughly three quarters of the long term growth rate of full Kelly, with far smaller swings.

These figures come from the standard approximation that growth rate is proportional to f(2 minus f) when f is expressed as a fraction of the Kelly bet. The key insight: the growth curve is flat near the top, so stepping back from full Kelly costs little growth, while overbetting is costly.

Why fractions protect you#

Estimation error#

Your edge is never known exactly. If your true edge is half of what you estimated, then half Kelly based on your estimate is actually full Kelly for your true edge. Using a fraction builds in a buffer against optimism, which is the most common error in trading.

Drawdowns#

Full Kelly can produce drawdowns of 50% or more even with a genuine edge. Half Kelly roughly halves typical drawdown depth. Since many traders abandon strategies during deep drawdowns, a smaller fraction makes it more likely you will stick with a good system. See Maximum Drawdown.

How to apply fractional Kelly#

1. Estimate your edge conservatively: use out of sample or live results, not the best backtest. See In-Sample vs Out-of-Sample Testing.
2. Calculate full Kelly from win rate and average win to loss. See Kelly Criterion.
3. Apply a fraction, commonly 0.25 to 0.5.
4. Cap it at your normal maximum risk per trade, such as 1% or 2%.
5. Recalculate periodically as more results come in.

In practice, step 4 often dominates: many traders' fractional Kelly calculations suggest 5% or more, and their 1% or 2% cap applies instead. That is a sign the strategy has a decent edge and the trader has a healthy margin of safety.

Fractional Kelly across many positions#

When several positions are open at once, especially correlated ones, the combined risk can exceed what Kelly for a single bet suggests. Portfolio level Kelly calculations exist but depend heavily on correlation estimates. A simpler rule is to cap total open risk. See Portfolio Heat and Correlation-Adjusted Sizing.

Common mistakes#

• Using fractional Kelly on an inflated edge and calling it conservative.
• Skipping the cap, letting a large Kelly figure drive oversized trades.
• Applying single bet Kelly to many correlated positions at once.

Frequently asked questions#

What is fractional Kelly?#

Betting a fixed portion of the full Kelly fraction, such as half or a quarter, to reduce drawdowns and protect against overestimating your edge.

Is half Kelly better than full Kelly?#

For most real traders, yes. It keeps around three quarters of the long term growth rate with much smaller drawdowns.

What fraction of Kelly should I use?#

Many practitioners use between a quarter and a half of full Kelly, and also cap risk at a fixed maximum per trade.

Next, learn how to adjust size when positions move together in Correlation-Adjusted Sizing.

Sources#

• Wikipedia, Kelly criterion