(Trade Like Wan)

You need to know just how strong your edge really is, rather than simply believing that your judgment is accurate.

Besides managing risk, which we discussed earlier, another key aspect of position management is maximizing the efficiency of your capital. Dancing on the edge of a cliff earns the loudest applause, but it's also the most dangerous.

There's a risk of falling to your death. Over a longer time horizon, it's indeed not really necessary, but if you do this, your capital will be fully utilized and you'll reach your goal sooner.

So how should we choose?

Should we prioritize staying in the game, or try to use our capital as efficiently as possible to reach our goal sooner?

This isn’t a simple risk-management question. It’s a choice involving the speed of capital growth, the probability of survival, and the cost of time

Dancing on the edge of a cliff may indeed make it easier to earn applause. But there’s another question we need to consider

Are you using the height of the cliff to your advantage, or paying for the performance with your life?

Position size too small: you’re right, but you don’t make enough money, and the time cost is high

Position size too large: your capital grows quickly when your assessment is right, but when it’s wrong, you may lose the ability to keep trading

Position size appropriate: maximize the value of correct assessments while preserving your ability to survive

Therefore, I don’t think the optimal strategy is to always trade small. Instead, position size should adjust to the quality of the opportunity, the risk-reward ratio, the reliability of your assessment, and your account’s capacity to withstand losses

What you really need to balance are three variables

1. Probability of survival

You have to stay in the game until the next opportunity comes along. A trading account isn’t meant to compete in just one contest; it must remain active through many uncertain market conditions. One loss is acceptable, but if a single mistake costs you most of your capital, then no matter how many times you’re right in the future, it won’t matter

2. Capital efficiency

With the same starting capital, market conditions, and trading ability, why leave so much capital idle? The point isn’t to keep your account fully invested at all times, but to put your capital to work when high-quality opportunities arise and preserve flexibility when your edge is insufficient

3. Time cost

If you want to reach a certain wealth goal by a specific age, being overly conservative also comes at a cost

Missed opportunities, slower growth, and the lost time value of your capital

But time pressure cannot be directly turned into a reason to increase your position size. Otherwise, you’ll take on greater and greater risks to catch up with your goal, eventually falling into a vicious cycle

These three variables can’t all be maximized at once. We need to find a balance that can be sustained over the long term

Don’t aim for the lowest risk; aim for the highest long-term growth efficiency

High capital utilization doesn’t necessarily mean high compound growth

Compounding amplifies the differences between strategies, but it also amplifies the damage caused by drawdowns

What’s truly worth pursuing isn’t proving how much risk you can withstand, but making sure your trading edge can pay off again and again

There’s a line between being aggressive and being reckless

A reckless person would say:

I got the direction right, so I should take a large position

A seasoned, aggressive trader would ask:

If I’m wrong, how much will I lose? If I’m right, how much can I gain? If I’m wrong three times in a row, will I still be able to keep trading?

The former determines position size based on confidence; the latter determines it based on risk and expected value

Back to the real question

If the goal is to reach your wealth target as quickly as possible, should we be willing to take on greater risk?

My answer is:

It’s acceptable to take greater calculated risks, but not risks you can’t afford to bear

We’re not trying to maximize the return on a single trade, but to maximize capital growth over a period of time

Mathematically, a sound position-sizing decision should account for the long-term logarithmic growth rate, not just the expected return of a single trade. Even if a strategy has high average returns, sufficiently severe losses can lower its long-term growth rate and even lead to ruin

We’re not trying to dance on the edge of a cliff. We’re trying to find a route that lets us move fast enough without falling off the cliff because of a single mistake

For someone with a genuine trading edge, the question most worth exploring isn’t how much of my capital I should put into a position. It’s this: when your market forecasts are highly accurate but your account capital is limited, should you use fixed-risk position sizing, the Kelly Criterion, or adjust your position size dynamically based on opportunity quality?

These three approaches reflect completely different ways of thinking about capital growth. I believe the third is most worth exploring in depth, but it must be based on reliable trading statistics and strict risk limits

Kelly Criterion

It examines one central question:

When you have a positive-expectancy edge, how much capital should you invest each time to maximize your long-term compound growth rate?

This directly reflects the tension we just discussed:

Position size too small: capital grows slowly;

Position size too large: drawdowns and the risk of ruin rise sharply

The Kelly Criterion neither encourages you to take oversized positions nor tells you to trade conservatively. It aims to find the bet size that maximizes long-term growth efficiency, given known probabilities and returns