# What is the Kelly formula? Effective capital management in betting

To effectively manage capital when trading, the application Kelly formula is a smart choice for investors. Yes, trading knowledge and capital management skills play an important and necessary role in the trading process. So, what is the Kelly formula? What is the origin of the Kelly formula? And how to use the Kelly formula effectively? Let’s Nhà cái 78Win Explore this topic in more depth.

**What is the concept of capital management?**

Capital management is simply adjusting and planning the effective use of capital in specific investment activities. Capital management plays an extremely important role because it directly affects your performance as well as the trading activities you perform. You cannot invest with too little or too much capital without a specific plan. Otherwise, you will easily lose money and suffer heavy losses.

To develop such a specific spending plan, you must answer questions related to capital allocation such as: What is the total amount available for investment? What is the capital allocation ratio for the categories? If there is profit, how is it distributed? For example, how much to reinvest, how much to save in savings, how much to reserve funds… These questions will help you plan specifically for spending activities, thereby easily managing capital and spending. more money.

**What is the Kelly formula?**

The Kelly Formula is a solution that helps traders know the optimal amount of money for each trade order. It shows what percentage of your total account you should bet to maximize profits and minimize risk in the long run. Learn about the history and how to apply the Kelly formula most effectively.

**History and origin of the Kelly formula**

The Kelly formula was developed by John Kelly, Jr., a founder who worked at AT&T’s Bell Laboratories, in the process of researching and developing chemical formulas. He initially applied this formula to solve the problem of long-distance telephone signals. Then he realized that this formula could also be applied to investments, including bets on casino and horse racing.

Many famous financial investors such as Warren Buffett, Bill Gross and Edward Thorp have become markers in the history of financial markets who have tested and used the Kelly formula to manage capital in the financial markets and earn significant profits. The Kelly formula has become a popular capital management tool and is widely used in investment activities.

**Kelly Formula**

The Kelly formula is expressed in the following way:

Kelly% = W – [(1 – W) / R]

*kelly formula chart*

In there:

- W is the win rate, which is the probability of winning over the total number of transactions.
- R is the profit/risk ratio.

For example: Considering your most recent trading history, you have made a total of 30 transactions, of which 15 were successful and profitable. The winning rate (W) will be 15/30 = 0.5. On average, each winning order will bring about 150 pips and on average each losing order will lose 90 pips. Therefore, the profit/risk ratio (R) will be 150/90 = 1.6.

Applying the W and R values to the Kelly formula, we have: Kelly% = 0.5 – [(1 – 0.5) / 1.6] = 0.1875.

**How to determine the value of W and R**

To find the value of W, you need to determine the total number of transactions in the most recent history. This transaction amount can be based on a month, year, quarter, or specific timeline. After listing the total number of transactions, you must classify and determine the number of successful and failed transactions. From there, you can calculate the value of W.

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To find the value of R, you can calculate the amount or pips of profit obtained from successful trades and divide it by the number of successful trades. Similarly, calculate the amount or pips you lost from failed trades and divide by the number of failed trades. Then, take the average value of these two numbers to calculate the value of R.

**Present the meaning of the standard result in the Kelly formula**

The Kelly ratio should always be less than 1. If the result of the Kelly formula is greater than 1, it means you have applied the wrong formula. The Kelly ratio indicates the maximum volume you should bet to maximize profits.

In addition, the K% index also helps you diversify your investment portfolio and allocate capital to each type of transaction, currency pair or stock in the most reasonable, optimal and safe way. However, this indicator does not predict the profit of the currency pair or foresee sudden price drops in the market.

**Meaning of Kelly formula**

The Kelly formula is extremely important in determining the level and amount of transactions. It affects the profit you make if the trade is successful and the amount you lose if the trade is losing. The Kelly formula also shows the relationship between profit and the Kelly ratio.

- The 1K value evaluates the maximum amount you should bet to maximize profits.
- The 1/2K mark is the optimal threshold to avoid risks when potential profits partially decrease.
- If the value is greater than 1K, it is a risk zone. The more you bet on each trade, the lower your potential profits.
- If it’s worth more than 2K, that’s a crazy number. You should not trade with such a large amount of money, because the more you trade, the more you will lose. If you still want to take risks, you may be burning your account needlessly.

However, the Kelly ratio only comes into effect when your most recent trades have had a change in win and loss ratio. In some special situations, using the Kelly formula may not bring effective results and lead to many losses. You should stop applying it and consider whether your method is correct or not. If you continue to apply, the risk of account burning is very high.

**Epilogue**

Although it does not guarantee high profits on all trades, the Kelly formula helps you minimize risk and maximize profits. The Kelly Formula is not alone in being the only capital management tool, but it is the most useful and optimal tool for investors new to the trading market. Practice on a demo account to evaluate the effectiveness of the formula and find the right ratio before applying it to a real account.