A tool that is used to determine the optimal percentage of trades at risk with respect to the overall portfolio. This is calculated by determining the percentage of trades expected to make profit, the return from a profitable trade, and the ratio of profitable trades to money-losing trades. Kelly criterion is given by:
Kelly% = W – [(1-W)/R]
Where: W is the percentage of profitable trades, R is the ratio of the average profit of profitable trades to the average loss of losing trades.
