Tech/Kelly Risk Engine

Kelly Risk Engine

Conservative position sizing using half-Kelly criterion

Kelly Criterion

The Kelly criterion determines the mathematically optimal fraction of bankroll to wager given edge and odds. For a binary bet with probability p of winning at odds b, the Kelly fraction is f = (bp - q) / b, where q = 1 - p. This maximizes long-run geometric growth rate of capital while avoiding ruin.

Half-Kelly Implementation

Full Kelly is optimal only with perfect probability estimates, which we never have. Half-Kelly (multiplying the Kelly fraction by 0.50) sacrifices ~25% of growth rate but reduces variance by ~50% and dramatically lowers drawdown risk. This is the standard approach for systematic trading with model uncertainty.

Kelly multiplier: 0.50 (half-Kelly)

Maximum position fraction: 20% of bankroll

Minimum model probability: 10%

Minimum edge threshold: 7%

Edge Thresholds and Guards

Multiple safety guards prevent the system from taking bad trades. The minimum edge threshold (7%) filters out noise where model and market roughly agree. The minimum probability floor (10%) avoids extreme tails where calibration degrades. The maximum fraction cap (20%) prevents over-concentration even when Kelly suggests larger sizes.

Edge < 7%: no trade (within noise band)

Model prob < 10%: no trade (unreliable calibration tail)

Kelly fraction > 20%: capped at 20% (concentration risk)

Daily exposure limit: configurable per-session cap

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