Understand the Kelly Formula in One Chart and Transform Your Investment Perception

Why do top gamblers never go All In?
Leeks usually only consider "rise" or "fall," but the Kelly formula tells us we need to consider these factors: the probability of rising, the potential upside, the probability of falling, the potential downside, and then calculate the position size.

First, let's discuss the core of the Kelly formula: investing is probability theory:

Don’t be greedy: Even with a high win rate, don’t "all in" in one shot, or you could lose everything in a single failure.
Don’t be conservative: When opportunities are good, betting more appropriately can earn more.

Dynamic adjustment: Adjust your bets based on current capital. Bet more when you have more money, bet less when you have less.
Good opportunities require heavy bets, but leave enough capital to withstand bad luck.

The difference between buying stocks/BTC and gambling is: if you lose, you only lose part of your capital, not everything (unless the stock/coin price drops to zero). In this scenario, the Kelly formula is:
f = p/l - q/g
Where
f is the optimal proportion of your investment (position size)
p is the probability of price increase (win rate)
q is the probability of price decrease ( q=1-p)
g is the magnitude of price increase (upside potential)
l is the magnitude of price decrease (downside risk)

When someone tells you to go all in, remember to use the Kelly formula to calculate what your optimal position should be.

The Kelly formula is like a “smart capital allocator,” helping you decide how much of your principal to invest in each trade or gamble, maximizing long-term gains while avoiding bankruptcy risk.

Precautions
Relying on accurate predictions: If you overestimate win rate or odds, the Kelly formula can lead you astray.

Avoid extreme cases: For example, if the formula suggests betting more than 100%, it’s a “trap” (there’s no such thing as guaranteed profit in reality).

Make practical adjustments: Many people use “half-Kelly” (betting half of the suggested proportion) to further reduce risk.

One sentence summary
The Kelly formula teaches you—“Good opportunities require heavy bets, but leave enough capital to withstand bad luck.”