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Intermediate

Understanding Position Sizing and the Kelly Criterion

A first-principles guide to position sizing for traders and investors who already have an edge but don't know how much to bet on it. Derive the Kelly Criterion from scratch, learn why full Kelly is too aggressive for real markets, and apply fractional Kelly and portfolio-level sizing to Indian equities, Nifty and Bank Nifty options, and futures.

MODULES
5
DURATION
~3.8 hrs
TRACK
Quantitative Finance
Access Level
LEARNER
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Curriculum Breakdown

Chapter 1: Why Position Sizing Is the Real Edge

3 Lessons
▶
Why Two Traders With the Same Edge Get Different Results11 min read
Preview
▶
The Anatomy of a Bet: Edge, Odds, and Bankroll12 min read
Preview
▶
Case Study: How Overleveraged Nifty Options Sizing Wipes Out a Winning System13 min read

Chapter 2: Deriving the Kelly Criterion

4 Lessons
▶
The Coin-Flip Game: Building Kelly From First Principles13 min read
▶
The Kelly Formula for Simple Bets: f* = Edge Divided by Odds12 min read
▶
From Coin Flips to Markets: The Kelly Formula for Continuous Returns14 min read
▶
Worked Example: Sizing a Nifty Swing Trade Using Kelly13 min read

Chapter 3: Fractional Kelly and Practical Adjustments

3 Lessons
▶
Why Full Kelly Is Too Aggressive for Real Trading12 min read
▶
Half-Kelly and Quarter-Kelly: The Growth-Versus-Volatility Tradeoff12 min read
▶
Estimation Error: Why Your Edge Number Is Probably Wrong13 min read

Chapter 4: Kelly Sizing in Indian F&O and Multi-Asset Portfolios

4 Lessons
▶
Sizing Nifty and Bank Nifty Options Positions Using Defined-Risk Kelly14 min read
▶
Sizing Futures Positions: Leverage, Margin, and the Kelly Fraction13 min read
▶
Portfolio-Level Kelly: Sizing Multiple Correlated Positions Together14 min read
▶
Case Study: Covariance-Adjusted Kelly for a Five-Stock Portfolio14 min read

Chapter 5: Where Kelly Breaks Down, and Putting It Together

4 Lessons
▶
Common Overbetting Mistakes That Blow Up Traders Who Know Kelly12 min read
▶
Kelly's Hidden Assumptions: Fat Tails, Regime Change, and Correlation Breakdown13 min read
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Alternatives to Kelly: Fixed Fractional Sizing and Volatility Targeting12 min read
▶
Building Your Own Position Sizing Framework: Key Takeaways10 min read