The math behind the Kelly Criterion is rather complex, which is why we will not deal with it here. However, on the Kelly Criterion Wikipedia page, under the header "Statement" you can see how the Kelly Criterion math works in more detail, and how you can use the calculations to place your bets.
Using the Kelly Criterion is also known as proportional betting, and many people factor it into their betting strategies. It is a strategy to help you figure out how much you should gamble on each bet. You bet a fraction of your bankroll according to the edge you think you have. If you do not have an edge, you do not make a bet.
You bet should consist of your edge divided by the odds the bookies give, but before we jump into the math, let’s consider the work groundwork you need to do first in order to determine your edge.
First Ask Yourself These Questions
The Kelly Criterion helps you decide how much you are going to spend on your bet, but first you need to ask yourself who, what, when, where and why.
Pick the team you are going to place your bet on after doing your research. It is the hardest question to answer and therefore deserves the most research.
Determine the best sort of bet to place, for a good chance of winning, you should pick a win-or-no-bet so you do not lose out if there is a draw.
Are you going to make your bet in play? Are you going to bet on fixed odds? Are you going to wait for the odds to change on the day and on the run-up to the match?
Which online or offline bookies are offering the most profitable odds? Are there any offering discounts or special offers on that match?
Decide if you are taking a risk, if you are offsetting a possible loss elsewhere, if you are looking for extra winnings, or if you are investing with the hopes of a small profit.
The Kelly Criterion Deals With The How
The last question is “how” much are you going to gamble? The Kelly Criterion formula is (bp-q)/b
b = the Decimal odds -1
p = the probability of success
q = the probability of failure
In other words, it is:
((The Decimal odds -1 x the probability of success) - the probability of failure) / the Decimal odds -1
Still Confused? Here Is An Example
You are betting on the flip of a coin, and the decimal odds are 2.00. The coin is wonky, so the actual chance of it landing on heads is actually 52%.
p = 0.52
So the probability of success is 0.52 because there is a 52% chance it will land on heads.
q = 0.48
The probability of failure is 48% because the chances of you winning are 52%, and 100-52 = 42%. Written as a decimal it turns to 0.48.
b = 1
As you read at the start, the decimal odds of winning are 2.00, and with the Kelly Criterion you subtract 1 from that amount. 2 - 1 = 1, so b is 1.
Work this out and you can figure out how much you should gamble.
(0.52x1 – 0.48) / 1 = 0.04
The Kelly Criterion suggests that you bet 4% of your bankroll on the coin flip.
Here Is Another Example
There is a team called "Butter’s Team" and the decimal odds they have are 6.00. You do not know the probability of success of the match, so what do you do?
You work it out based on your own research. How often have they won this season, have they been lucky or not, have they played this game before and won? Are they playing at home, on conditions that suit, at times that suit, and are they playing with all their star players? Do they have more to lose if they do not win, and is the team they are playing known for struggling against your team?
You figure that the Butter Team has a 66% chance of winning (which is your p). Take 66 from 100 and the probability of losing is 34% (which is your q). The odds are 6.00, so subtract 1 to get 5, and that is your b.
((5 x 0.66) - 0.34) / 5 = 0.59
That means the Kelly Criterion figures you should bet 59% of your bankroll. If you had ten Euros and spent around six Euros, you would get back 36 Euros.
What Do People Mean By Fractions?
You may see some people online say that they use the Kelly Criterion to come up with their stakes, but that they use fractions to do it. What they mean is that they decide in advance how much of the Kelly Criterion result they will use. For example, a punter may decide on a third. If the same punter did the calculation in the previous example and came up with 59%, then the punter would bet a third of that, meaning he or she would only bet around 20% of his or her bankroll.
Does using fractions make the Kelly Criterion invalid? It doesn’t because you decide to use the same fractions for all the bets you place. If you decide to only bet a third of every Kelly Criterion result, then it still works and makes you money without the risk of running into ruin too quickly.
For some people, a Kelly Criterion result of 59% is a little too high, especially when the punter only figures there is a 66% chance of winning (as in the example). That is why they decide in advance to only use a dedicated portion (fraction) of the Kelly Criterion result when betting.
If you are looking for a way to figure out how much to bet without running yourself to ruin too quickly, then the Kelly Criterion may be the system for you if you use a fraction of the mathematical result. However, using the Kelly Criterion is no guarantee of success because yet again, as with most betting strategies, you still have to figure out the probability of success yourself.