Two traders have the exact same strategy. After one year, one has doubled their capital; the other is down 30%. The difference? Position sizing. How much you bet on each trade is more important than what you bet on.
The Kelly Criterion
The Kelly Criterion gives the mathematically optimal fraction of capital to risk on each trade: Kelly % = W − (1−W)/R, where W is your win rate and R is your average win/average loss ratio.
Example: Win rate 55%, average win ₹5,000, average loss ₹4,000. R = 5000/4000 = 1.25. Kelly % = 0.55 − (0.45/1.25) = 0.55 − 0.36 = 19%. This means risk 19% of capital per trade at full Kelly.
Why Full Kelly is Dangerous
The Kelly formula assumes your statistics are precisely known and stable — they aren't. If you're overestimating your edge, full Kelly over-sizes dramatically. Most professional traders use half-Kelly (0.5 × Kelly %) as a practical compromise between growth and drawdown.
Fixed Fractional: The Practical Alternative
Simpler than Kelly: risk a fixed percentage (1–2%) of current capital per trade. This scales down automatically in drawdowns (protecting you) and scales up automatically as equity grows (compounding). Most retail traders do best with 1–1.5% risk per trade.
For Indian retail traders with ₹5–50 lakh capital, a strict 2% risk rule means you can sustain 20+ consecutive losses before losing half your capital. This is psychologically sustainable. Full Kelly is not.
Position Sizing in BacktestHub
BacktestHub allows you to set position sizing rules: fixed lots, fixed capital, fixed risk percent, or Kelly fraction based on historical win rate/payoff. You can see how each method would have affected your equity curve and drawdown profile before committing real capital.
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