Lesson 1
Position Sizing
Size positions based on regime clarity and stop distance. Bigger positions when signals are clear and stops are tight. Smaller when uncertain or stops are wide.
Position sizing determines your returns more than stock picking. Here's how to size for different conditions.
The Core Principle:
Risk per trade should be consistent. Size varies with:
- Stop loss distance (wider stop = smaller position)
- Conviction level (higher conviction = larger position)
- Regime clarity (clearer regime = larger positions)
The Formula:
Position Size = (Account Risk %) / (Stop Loss %)
Example: 2% account risk, 10% stop = 20% position size
Regime-Based Sizing:
Clear Regime (High Confidence):
- Individual positions: Up to 20%
- Category exposure: Up to 50%
- Leverage: Modest OK
Transition Zone (Medium Confidence):
- Individual positions: Max 10%
- Category exposure: Max 30%
- Leverage: None
Unclear/Conflicting (Low Confidence):
- Individual positions: Max 5%
- Category exposure: Max 20%
- Cash: 50%+ acceptable
The Kelly Criterion (Simplified):
Optimal bet size = Win % - (Lose % / Win:Loss Ratio)
If you win 60% of trades with 2:1 reward/risk: Kelly = 0.60 - (0.40/2) = 0.40 or 40%
Most use 'Half Kelly' for safety: 20%
Check your understanding
Lesson Quiz
Quiz Check
A stock you're bullish on is breaking down. Your stop is at a 20% loss. In a clear bullish regime, should you move it wider to 30%?
Quiz Check
What's the Kelly Criterion and why should you use Half Kelly?