the.com/position sizing
the only trading decision that decides if you get to make another one.
means determining how much capital to risk on a single trade relative to your total portfolio, so no single loss can wipe you out.
from formalized in gambling and trading math through the kelly criterion (1956), a bell labs formula for optimal bet sizing under uncertainty, later smuggled into wall street by quants and poker players alike.
kelly criterionclaude shannon and ed thorp used it to beat blackjack
1% rulemost pros risk under 2% of capital per trade
ruin matha 50% loss needs a 100% gain to recover
bigger than entriesoutperforms stock picking in most backtested studies
for instance
ed thorp — applied kelly sizing to markets, ran princeton newport for 19 years without a losing year
long-term capital management — 1998 collapse traced partly to oversized leveraged bets
jesse livermore — early 1900s trader who scaled winners and cut losers fast
turtle traders — 1980s program taught rule-based sizing over prediction skill