Position Sizing and the Kelly Criterion for Traders
By Daniel Chau
Founder, NeuroBacktest
Learn how to size your trades using Kelly Criterion and fixed-fractional methods to maximize growth while controlling risk.
Position sizing is often more important than entry timing. A great strategy with poor position sizing will eventually blow up. A mediocre strategy with disciplined sizing can survive and compound.
Fixed Fractional Sizing
The simplest method: risk a fixed percentage of capital on each trade, typically 1-2%. If your stop-loss is 5% away, you size your position so that a 5% move against you costs 1% of your total account.
The Kelly Criterion
Kelly optimizes position size based on win rate and payoff ratio. The formula is:
Kelly % = W − (1 − W) / R
Where W is win rate and R is average win/average loss. Full Kelly is usually too aggressive for real trading; many traders use half-Kelly or quarter-Kelly.
Practical Recommendation
Start with 1% risk per trade. Only increase size after you have a statistically significant backtest showing positive expectancy. Use NeuroBacktest to simulate how different position sizing rules affect equity curves and maximum drawdown.
Frequently Asked Questions
What is the Kelly Criterion?▼
The Kelly Criterion is a formula that calculates the optimal fraction of capital to risk on a trade based on win rate and average win/loss ratio. It aims to maximize long-term growth.
Should I use full Kelly position sizing?▼
Most traders avoid full Kelly because it can produce large drawdowns. A common approach is 'half Kelly' or fixed fractional sizing to reduce volatility while keeping most of the growth benefit.
Why does position sizing matter more than entry timing?▼
Position sizing determines how much you lose when wrong and how fast you recover. Even a high-win-rate strategy can fail with poor sizing, while solid sizing can make a mediocre edge profitable.