Implementing Fractional Kelly Sizing with ML Predicted Edge

Category: Strategy Backtesting & Evaluation • Article #18 • Reading time: 5 minutes

Overview

Kelly criterion: bet fraction = edge / odds. If ML model predicts 51% win rate on a trade, edge = 1%, Kelly fraction = 1%. Full Kelly is risky (variance); use fractional (0.25×Kelly = 0.25%). Combine ML predictions with Kelly sizing for optimal position sizing.