/position-sizing

name: position-sizing
description: Trade sizing methods including fixed fractional, volatility-adjusted, Kelly criterion, and liquidity-constrained sizing

Position Sizing

Position sizing is the single most important risk management decision in trading. Your entry signal determines direction; your position size determines survival. A mediocre strategy with proper sizing will outperform a great strategy with reckless sizing over any meaningful time horizon.

**Core principle**: Size determines survival, not entries. Two traders with the same signals but different sizing will have wildly different outcomes. The one who sizes conservatively survives drawdowns and compounds capital; the one who oversizes blows up.

Methods Covered

| Method | Best For | Key Input | |--------|----------|-----------| | Fixed Fractional | General trading, most recommended | Account risk % | | Volatility-Adjusted | Volatile markets, multi-asset | ATR or realized vol | | Kelly Criterion | Quantified edge with track record | Win rate + payoff ratio | | Liquidity-Constrained | Low-liquidity Solana tokens | Pool depth | | Anti-Martingale | Trend-following strategies | Recent P&L streak |

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1. Fixed Fractional Sizing

The most recommended method for most traders. Risk a fixed percentage of your account on each trade.

Formula

risk_amount = account_value * risk_percentage
price_risk_per_unit = entry_price - stop_loss_price
position_size_units = risk_amount / price_risk_per_unit
position_value = position_size_units * entry_price

Risk Tiers

| Tier | Risk Per Trade | Use Case | |------|---------------|----------| | Conservative | 0.5–1% | New strategies, drawdown recovery | | Standard | 1–2% | Most traders, proven strategies | | Aggressive | 3–5% | High-conviction setups with strong, measured edge |

Example

account = 10_000  # $10,000 or 100 SOL
risk_pct = 0.02   # 2%
entry = 1.50
stop_loss = 1.30

risk_amount = account * risk_pct          # $200
price_risk = entry - stop_loss            # $0.20
position_units = risk_amount / price_risk # 1,000 tokens
position_value = position_units * entry   # $1,500

With this sizing, if the stop loss is hit, you lose exactly 2% of your account regardless of the token's price or volatility.

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2. Volatility-Adjusted Sizing

Scale position size inversely with volatility. When volatility is high, take smaller positions; when low, take larger positions. This normalizes the dollar risk across different market conditions.

Formula

adjusted_size = base_size * (target_vol / current_vol)

Where:

• `target_vol`: your desired daily portfolio volatility (e.g., 2%)
• `current_vol`: the token's current daily volatility (from ATR or realized vol)

Using ATR

atr_14 = 0.12          # 14-period ATR
close_price = 1.50
daily_vol_pct = atr_14 / close_price  # 8%

target_daily_vol = account * 0.02      # $200 target daily move
position_size = target_daily_vol / atr_14  # 1,667 units

This automatically reduces exposure in volatile markets and increases it in calm ones.

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3. Kelly Criterion

The mathematically optimal fraction of capital to risk, maximizing long-term growth rate. Derived from maximizing expected logarithmic utility.

Formula

f* = (p * b - q) / b

Where:

• `p` = win rate (probability of winning trade)
• `q` = 1 - p (probability of losing trade)
• `b` = average win / average loss (payoff ratio)
• `f*` = optimal fraction of capital to risk

Equivalent form: `f* = (p * (b + 1) - 1) / b`

Critical Rule: NEVER Use Full Kelly

Full Kelly assumes perfect knowledge of your edge. In practice, edge estimates are noisy. Always use fractional Kelly:

| Fraction | Use Case | Notes | |----------|----------|-------| | 0.25x Kelly | Conservative, recommended default | Robust to edge estimation error | | 0.50x Kelly | Moderate, for well-measured edges | Still significant drawdown risk | | 1.0x Kelly | Never in practice | Theoretical maximum, catastrophic if edge is overestimated |

Example

win_rate = 0.55       # 55% win rate
avg_win = 2.0         # Average win is 2x the average loss
avg_loss = 1.0
payoff_ratio = avg_win / avg_loss  # b = 2.0

kelly = (win_rate * payoff_ratio - (1 - win_rate)) / payoff_ratio
# kelly = (0.55 * 2.0 - 0.45) / 2.0 = 0.325 = 32.5%

quarter_kelly = kelly * 0.25  # 8.1% — use this
half_kelly = kelly * 0.50     # 16.25%

**If Kelly is negative, you have no edge. Do not trade.**

See `references/sizing_formulas.md` for the full mathematical derivation.

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4. Liquidity-Constrained Sizing

Critical for Solana tokens. Even if your risk model says you can take a large position, the pool may not support it without unacceptable slippage.

Formula (Constant-Product AMM)

slippage ≈ trade_size / pool_liquidity
max_trade = pool_liquidity * max_slippage_pct

Rules of Thumb

| Constraint | Guideline | |-----------|-----------| | Max single trade | 2% of pool liquidity | | Max position | 5% of pool liquidity | | Minimum pool depth | 10x your desired position size |

Example

pool_sol = 500          # 500 SOL in pool
max_slippage = 0.02     # 2% max slippage

max_trade_sol = pool_sol * max_slippage  # 10 SOL
# For a $150 SOL price, that's $1,500 max per trade

**Always check all pools**, not just the largest. Aggregate liquidity across Raydium, Orca, and Meteora for the full picture. See the `liquidity-analysis` skill for pool depth assessment.

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5. Anti-Martingale Sizing

Increase size after wins, decrease after losses. This is the opposite of the gambler's fallacy (Martingale). The logic: winning streaks may indicate your strategy is in sync with the market; losing streaks may indicate regime change.

Implementation

def anti_martingale_size(
    base_size: float,
    consecutive_wins: int,
    consecutive_losses: int,
    scale_factor: float = 0.25,
    max_multiplier: float = 2.0,
    min_multi