The Kelly Criterion
What exactly is the Kelly Criterion?
The Kelly Criterion enables you to calculate your optimum stake according to the betting odds and your forecast. Betting any more would involve a pointless risk and betting any less would involve lower returns.
The optimum stake is expressed as a percentage of the total sum that you allocate to sports betting.
How do I calculate my stakes with the Kelly Criterion?
To calculate your stake, you need to know the bookmaker's odds (O) and to have accurately calculated the probability of a successful outcome for your prediction (P). Therefore, the formula is as follows:
Calculation of your betting portfolio as a % = (O * P-1) / (O-1)
Example of a Kelly Criterion calculation
Nadal - Federer tennis match
Your betting portfolio is 1000 euros. The following odds are offered:
You're using a reliable statistical model and estimate that Federer has a 50% chance of winning the match. The odds of 2.1 are overestimated, making this a value bet.
The Kelly criterion allows you to calculate the optimum stake:
Kelly % = (2.1 * 50%-1) / (2.1-1) = 4.54%
Therefore, you should stake 4.54% of your betting portfolio, i.e. 45.4 euros (4.54% x 1000 euros).
Note that this system will only make you a profit if you calculate the probability more accurately than the bookmaker! If your estimates are wrong, the strategy could quickly accumulate your losses.
The Kelly Criterion: Our advice
Limit your maximum stakes to avoid the risk of suffering overly damaging losses. Set a limit for your stakes (e.g. between 1% and 5% of your portfolio), or multiply the percentages given by the Kelly Criterion by a coefficient of between 0 and 0.5.
Be extremely disciplined. Even if you would personally like to stake more, you must limit yourself to the stakes calculated by the system. The Kelly Criterion pays off in the long term!
Always bear in mind that the Kelly Criterion is only effective if you are better at anticipating the results of the events than the bookmakers are! And rest assured that SportyTrader is here to help you do just that!