What is Kelly Criterion?
The Kelly criterion is a formula, from a 1956 paper by John Kelly, for the fraction of capital to stake on a favorable bet so that wealth grows fastest over the long run. It needs the true win probability and payoff, which traders only ever estimate, and its full-size bets produce deep drawdowns.
Why Kelly Criterion matters
It shows that there is such a thing as betting too much on a real edge, and why many practitioners use a fraction of it or avoid it.