Track 08Module 1 of 58 sources
Position sizing and risk of ruin
Turn a stop distance and an account size into a position, and understand why sizing matters more than entries.
Key ideas
- Size from the stop. Risk per trade divided by the distance to the stop gives the quantity. One percent of capital per trade is a common ceiling.
- The Kelly fraction maximises long-run growth, but only if you know your edge exactly. Betting half of it gives up little growth and cuts drawdowns sharply.
- A fifty percent loss needs a hundred percent gain to recover. Avoiding deep drawdowns is worth more than an extra winner.
- Size positions so that each contributes similar risk. Volatile stocks get smaller positions.
Start hereWatch or read these first. They carry the core idea.
Position Sizing – Part 1 | Understanding the Foundations | The Long & The Short Ep.19
Video · In The Money by Zerodha · 18:56
Position sizing from first principles.
The Kelly Criterion - Formula That Tells You Exactly How Much to Bet | The Long & The Short Ep. 38
Video · In The Money by Zerodha · 16:25
The Kelly criterion with trading examples.
Course
Varsity Module 9: Risk Management and Trading Psychology
Zerodha Varsity
Risk management and trading psychology as a written course.
CoreThe standard references. Work through them once the idea is clear.
PDF
The Kelly Criterion and the Stock Market
Edward O. Thorp
The original practitioner paper on Kelly in blackjack, sports betting and the stock market.
Book
A Man for All Markets
Edward O. Thorp
The memoir of the mathematician who beat the casino and then the market.
Book
Go deeperResearch, primary sources and data for when you want the detail.
Paper
The ergodicity problem in economics
Peters · 2019 · Nature Physics · doi:10.1038/s41567-019-0732-0 · free copy
Why averages over many people mislead about what happens to one person over time.
Practice
Use the calculator on the Desk to size your next three trades at one percent risk. Compare the quantities with what you would have bought by feel.
See it live
Where this leads
08.2 · Risk, Losses and ProcessWhy most traders lose: the evidenceKnow the base rates for retail trading so that your plan starts from reality.08.5 · Risk, Losses and ProcessBuilding and testing a systemWrite rules precise enough to test, test them without fooling yourself, and know when a backtest means nothing.