Continuation about Martingale betting system. Today we’ll talk about Kelly criterion. I will also provide example with good overview ;-).
To read the first part of this post pls go here – Martingale Betting System
Kelly criterion in Martingale Betting Strategy
The criterion was developed in 1956 year by John L. Kelly, and is also known on the exchange as the strategy of the “geometrical average maximization of the bank”, it is also an improved strategy of the bank percent. In the case of the Kelly Criterion the percent of the bank isn’t fixed and depends on the rightness of the guessing of the credibility of the sport event.
The Kelly criterion, and this is the difference between this strategy and the strategies like Martingale, won’t lead you to the bankrupt, because it always determines the sizes of the stakes in percents from the money you have got.
That’s why the risk of complete bankrupt is eliminated. But this criterion requires from you to value the chances of the evens right, and of course not worse that the book-maker does it. If it is so the next formula gives the optimal size of the stake: ((coefficient*your guess) – 1)/ (coefficient – 1)
The example:
Your bank is 10000$. The coefficient for the event is 5.00. Your guess for the event is 0.25 (25%). We get then: (5.00*0.25-1) / (5.00-1) =0.0625. So you see that you have to bet on this event $625 (0.0625*$10000).
The main preference of this strategy is that you lose less money, when your bank is decreasing. If your average stake is 10% from entire your money, you after losing six times you will have 48% from your starting bank. And if you guess the credibility of the events on the 10% better, than the book-maker does it, the credibility of your losses on the events with the coefficients two ten times is only 0.033%! But at the same time, Kelly criterion won’t lead you to the quick enriching. In average, with every next stake your bank will grow on 5, if you guess the credibility right.
(!) Before you start to determine the sizes of the stakes with the Kelly criterion you should decide some things for yourself:
The size of the bank
It is enough to determine the money in the volume of the 10-15 sizes of your average stakes. Of course, you have to be ready to lose this money, though not only after one time and not entire sum.