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KellyCriterion

Advanced Betting Strategy that can help limit losses and increase gains

What is a Kelly Criterion Strategy?

Kelly Criterion is a formula that is applied to find out the optimal sum of money that is suitable to be invested on a certain occasion. It takes into account the total sum of money that is accessible to use, as well as the expected return. Developed by a research worker at Bell Labs named John Kelly. He originally developed the formula to study telephone signal noise (long-distance).

The percentage obtained from the Kelly Criterion formula represents the size of a position an investor is supposed to take. This helps to diversify portfolios, and also with financial management.

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How does Kelly Criterion Strategy work?

The Kelly Criterion comes with two basic components. The first component is the probability of the win and the chances that any given trade will provide a positive amount.

The second component is the win/loss ratio. This consists of the entire positive trade amounts divided by the totality of the negative trade amounts.

The Kelly formula is then applied to these two factors, the formula is as follows:

f= (bp – q) / b

In this formula, “b” is the multiple of an investor’s stake that they can win from the proposed wager. With the decimal odds present, b is the counterpart of the odds, minus one.

For instance, a \$10 wager at 4.00 results in a total of \$40 being returned (including the initial stake). The amount that is won is \$30 or regarding the stake, a multiple of 2.

“p” is calculated as the probability of the suggested wager winning. For instance, a wager with a 30% chance of success is bound to win 0.30.

“q” is calculated as the chances of the proposed wager losing i.e., “q” is calculated as 1 minus “p”. If the same wager example is used, with a 30% chance of success, there might be a 70% probability of it losing. The chances of it losing is, thus, 0.70.

“f” is ultimately the solution part of the formula. It provides the investor with the suggested fraction of their bankroll to stake on the suggested wager.

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Kelly Criterion & Expected Value

An example of this would be the odds of 2.00 having an “implied probability” of 0.50. How to calculate implied probability? Check our odds page, section how are betting odds calculated. This implies that a wager made at these odds has a 50% percent chance of winning. If the investor believes that a wager has more than a 50% probability of winning, in that case, it has a positive expected value.

With this formula, it is only best to make bets where a positive expected value is present. This is because it only properly works for wagers with the positive expected value. It is best not to place a wager if the odds are not high enough to make up for the risk of losing.

The value is subjective in sports betting terms though. This is because different people will have different opinions on the chances of any specific wager winning. This is where the Kelly equation comes in. The formula returns a negative for a suggested wager with no positive expected value, regardless of opinions, suggesting not to make the bet.

For example, take a tennis match between Player 1 and Player 2 where the investor’s chosen bookmaker is presenting the following odds:

Player 1 – 2.50

Player 2 – 4.60

The investor believes there is a 45% chance (0.45 probability) that Player 2 might win, so they decide to place a wager on them. Using the Kelly Criterion formula to determine the investor’s stake, the required calculation would look like this.

{(3.60 x 0.45) – 0.55} / 3.60 = 0.30

Thus, the Kelly Criterion suggests that the investor should bet 30% of their bankroll on Player 2.

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The Kelly Criterion is a quite straightforward formula when it comes to deciding how much to bet. Once understood it is relatively easy. The only thing one has to do is put the relevant variables into the formula then calculating the formula either manually or on a calculator. Another advantage is that the formula takes into consideration the investor’s bankroll. The fact that this strategy applies the theoretical value of wagers is what sets it apart from others. This enables investors to get the optimal balance between increasing their bankroll and securing it. The strategy also aids in preventing the placing of wagers where there is no positive expected value.

The formula is useful only when the investors can accurately determine the probabilities of any proposed wagers. The whole concept goes to waste if one has difficulty doing that. Another disadvantage that comes from using this strategy is that it could prove to be very risky. In the example above, the equation suggested a stake equal to 30% of the investor’s bankroll. This is a very high percentage, hence proving the riskiness of the strategy. People can also adopt a “fractional Kelly strategy” but that still does not make up for the primary disadvantage. Despite how much one adjusts the formula, it still cannot determine the selections one should make on their betting slips.

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The Kelly Criterion: Our View

This particular formula has polarizing views from betting experts and bettors alike. With one extreme in its favor and the other against it, it is quite a controversial strategy.

There are many that question this formula. On the other hand, some people think this makes perfect sense and should not be debated.

But, in our opinion, while it has its disadvantages, it has its advantages as well. With what the formula suggests, it is sound advice to stake more money on wagers of good value. However, his formula does not guarantee that the investor implementing it will profit from it all the time. It may be based on strong reasoning, it is still a risky formula to work with.

This system will, without a doubt, help with diversifying portfolios, but there are many things it cannot promise. There is always the interference of luck and/or chance in the markets, altering returns. All in all, when used wisely, it can help limit losses and increase gains through effective diversification.

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