Monday morning. Friend's WhatsApp on a "high conviction" trade. Sixty forty win rate. Even money payoff. Asks how much of the book to put on it.
"This is a setup I have been waiting four months for. Half my book feels right. Maybe a third on a cautious day." The instinct on a high-conviction sixty forty trade is to size up. The math says size down. The Kelly formula on that edge lands at twenty pct of book. Half Kelly, the version actual quant traders use, lands at ten. He was about to oversize the chart he was right about by a factor of two.
30pct
Instinct . cautious half-book
What the brain wants on a high-conviction setup. Anchored on conviction not on geometry.
20pct
Full Kelly . the formula
Maximises long-run log wealth. Compounds at the theoretical max. Spreadsheets love it. Bankrolls do not.
10pct
Half Kelly . the practice
Three quarters of the return for roughly half the drawdown. What every quant fund actually runs.
Sizing is the bridge between an edge and a portfolio that compounds. The brochure prints the edge. The trader sizes the trade. The math says the size, not the conviction, is what decides whether the next ten years compound or unwind. Card two opens the ladder. Card three runs the drawdown stress test.