Position sizing & risk
Having a real edge is not enough. Position size determines whether that edge compounds over time or whether you go broke on the way.
The problem
In a trade, bet or investment with positive expected value, the size of the position matters. Too little leaves potential growth unused. Too much means one bad outcome can reduce capital so far that recovery becomes impossible, even when the edge is real in the long run.
Common approaches
A fixed euro amount is simple but ignores the size of the edge. It is too small for a particularly strong opportunity and too large for a marginal one. The opposite extreme, putting everything into the opportunity that looks best, is more dangerous: one bad path can wipe out the capital.
The mathematical middle ground
The useful position size rises with win probability and payout ratio. The Kelly criterion calculates that relationship. In practice, many people use only a fraction, such as half Kelly, to reduce short-term volatility at a smaller cost in long-term growth.
For the formula and a full example, see The Kelly criterion explained simply.
In practice
With these values you can calculate an orientation for position size. The number should still be checked against liquidity and the total portfolio.
Worked example
With a 55% win probability and a payout ratio of 1.2, Kelly gives 22.5% of capital. For €10,000, that is €2,250. Half Kelly reduces it to €1,125.
Losing streak
Several losses can occur even with positive expected value. If you risk the same percentage of current capital, the euro amount falls automatically. With fixed euro stakes, the next stake becomes larger relative to what remains.
A 20% loss requires a 25% gain to recover; a 50% loss requires 100%. Position size determines not only growth but whether the plan survives. A strategy that works only if results immediately turn good is too aggressive.
Before the stake
Use Kelly or a fraction as an orientation afterwards. The best number is not the largest mathematical number, but the one you can follow after a bad month.
Enter win rate and payout ratio, then calculate the stake with the Kelly calculator.
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