Kelly Criterion tells you how to size individual positions. Bankroll management tells you how to allocate capital across strategies. When to scale up. When to scale down. How to survive drawdowns.
Kelly vs bankroll management
Kelly optimizes individual positions. Bankroll management optimizes your entire portfolio. Different problems. Both matter.
Kelly Criterion
Answers: How much should I bet on this specific position?
Inputs: Your edge. Market price. Variance. Output: Optimal position size.
Bankroll management
Answers: How much capital should I deploy? When should I scale? How do I manage drawdowns?
Inputs: Total capital. Current drawdown. Market conditions. Output: Capital allocation decisions.
Capital allocation framework
Divide your capital into buckets. Allocate strategically. Not everything goes to positions.
Trading capital (70-80%)
Capital actively deployed in positions. This is what Kelly sizes.
Example: $10,000 bankroll. $7,500 trading capital. Kelly suggests 20% per position. That's $1,500 per position. Not $2,000.
Reserve capital (20-30%)
Capital held in reserve. For drawdowns. For better opportunities. For emergencies.
Example: $10,000 bankroll. $2,500 reserve. If you hit a drawdown, you have capital to continue. Don't deploy everything.
When to scale up
Scale up when you're winning. But scale carefully. Don't get greedy.
- You're consistently profitable - track record matters
- You have more opportunities - more mispricings found
- Markets are liquid - can execute larger sizes
- Your edge is validated - past trades confirm your analysis
- You're not in a drawdown - scale from strength, not weakness
How to scale: Increase trading capital by 10-20%. Not 50%. Gradual increases. Test larger sizes. Then scale more.
When to scale down
Scale down when you're losing. Or when conditions change. Preserve capital.
- You hit a drawdown - reduce size immediately
- Markets become illiquid - can't execute efficiently
- Your edge disappears - mispricings corrected, no new ones
- Uncertainty increases - settlement risk, market structure changes
- You're making mistakes - emotional trading, poor analysis
How to scale down: Reduce trading capital by 30-50%. Immediately. Don't wait. Preserve capital. Live to trade another day.
Managing drawdowns
Drawdowns happen. How you manage them determines survival.
10% drawdown
Reduce position sizes by 20%. Review your analysis. Check for mistakes.
Example: You were sizing at 20% Kelly. Reduce to 16% Kelly. Continue trading. But more carefully.
20% drawdown
Reduce position sizes by 50%. Stop taking new positions. Review everything.
Example: You were sizing at 20% Kelly. Reduce to 10% Kelly. Only trade your best ideas. Stop trading mediocre opportunities.
30% drawdown
Stop trading. Close positions if possible. Take a break. Figure out what went wrong.
Example: You're down 30%. Stop. Don't try to trade your way out. That's how you lose everything. Take a break. Come back later.
Manage your bankroll strategically
Bankroll management determines long-term survival. Get early access to tools that help you allocate capital, track drawdowns, and scale strategically across Kalshi and Polymarket.
Conclusion
Kelly Criterion tells you how to size individual positions. Bankroll management tells you how to allocate capital across strategies. Both matter.
Divide capital into buckets. 70-80% trading capital. 20-30% reserve. Scale up when winning. Gradually. Scale down when losing. Immediately. Manage drawdowns aggressively. 10% drawdown: reduce sizes. 20% drawdown: reduce more. 30% drawdown: stop trading.
Bankroll management determines survival. Not just profitability. Preserve capital. Live to trade another day. That's how you win long-term.