In another thread (http://elitetrader.com/vb/showthread.php?s=&threadid=251271) I am in dispute with another poster (kut2k2) over the correct calculation of the Kelly formula. Because of this, we are disagreeing over which trade is the more attractive and should be bet on with bigger size. Since kut2k2 responded to my disputation of his calculations by putting me on ignore, I am unable to see how he would respond to my post clarifying why I disagreed. I would therefore like to get input from other people familiar with the Kelly criterion to double check which approach they think is correct, so I can be more sure which one is right. Here is a summary: Initial post: "Consider two hypothetical setups. One setup has a winning rate of 55% with a potential profit of $433 and a potential loss of $407. The other setup has a winning rate of 10%, a potential profit of $1000 and a potential loss of $50. Both have the same expectancy at $55. Which setup do you find more attractive and why?" My Kelly calculation: "System A: Kelly = (.55*(433/407+1)-1)/(433/407) = 12.7% System B: Kelly = (0.1*(1000/50+1)-1)/(1000/50) = 5.5%" kut2k2's calculation: "Finally we look at the Kelly fractions: k(A) = .55/(407/500) - .45/(433/500) = 0.156 k(B) = .1/(50/500) - .9/(1000/500) = 0.55 k(C) = .001/(45.05/500) - .999/(100,000/500) = 0.0061 â¢ Setup B wins this comparison by a wide margin." It appears to me as though kut2k2 is mistakenly adjusting the win rate by the *loss* payout, rather than by the win payout, and therefore getting an incorrect result. Here is the Kelly formula: http://www.investopedia.com/article...g/04/091504.asp 'The Basics There are two basic components to the Kelly Criterion: â¢ Win probability - The probability that any given trade you make will return a positive amount. â¢ Win/loss ratio - The total positive trade amounts divided by the total negative trade amounts. These two factors are then put into Kelly's equation: Kelly % = W â [(1 â W) / R] Where: W = Winning probability R = Win/loss ratio The output is the Kelly percentage,' Using the examples above: Setup A: W (winning probability) = 55%. R (win/loss ratio) = 433/407. Therefore Kelly % = .55 - [(1-.55)/(433/407)] = 0.127 = 12.7% Setup B: W = 10%. R = 1000/50. Therefore Kelly % = .1 - [(1-.1)/(1000/50)] = 0.055 = 5.5% Setup A is therefore superior according to Kelly. I would appreciate clarification, double-checking, and input from other posters.