Stop Thinking in Absolutes
Aug 7, 2025
The market is a river, and you’re standing in it with a bucket. Most traders try to capture the whole flow in one scoop, then wonder why they drown. Position sizing isn’t about being right—it’s about recognizing that the river never stops moving, never holds its shape, never respects your analysis. Heraclitus knew this 2,500 years ago: you can’t step into the same river twice because it’s not the same river and you’re not the same you. The market you analyzed this morning doesn’t exist by afternoon. The setup that looked perfect at entry has already mutated by the time you’re filled.
This is why blow-ups happen. Not from bad ideas—bad ideas are just tuition. Real destruction comes from rigid exposure in a fluid game. The trader who sizes every position at 10% of capital because “that’s the rule” is fighting water with concrete. The market’s nature is flux, constant adjustment, eternal becoming. Your position sizing must mirror this truth or the river wins. And the river always wins eventually—the only question is whether you’ll still be standing when it does.
Sizing strategy is how you stay dangerous without becoming endangered. It’s the difference between the swimmer who moves with the current and the one who fights it until exhaustion. Most traders think position sizing is risk management. Wrong. It’s reality management—the acknowledgment that what you think you know is already obsolete, that your edge is temporary, that the only constant is change. Size accordingly or size yourself out of the game.
Static Sizing: The False Comfort
The simplest strategy seduces with its symmetry: divide your capital by ten, allocate equally, sleep soundly. Ten trades, 10% each. It’s democratic, defensible, and completely delusional. This isn’t strategy—it’s what you do when you’ve given up thinking. Markets breathe at different rhythms. Volatility expands and contracts like a living thing. Your equal-weighted exposure becomes wildly unequal the moment you place it.
Static sizing is the financial equivalent of wearing the same clothes in all weather. That 10% position in a utility stock and 10% in a biotech startup aren’t remotely the same bet. One might move 1% a month, the other 10% a day. You’ve created the illusion of balance while accepting radically different risk profiles. The market doesn’t care about your neat percentages—it cares about standard deviations, beta, the actual movement of actual money.
This false comfort kills slowly. You think you’re disciplined because you follow a rule. But discipline without intelligence is just stubbornness. The market changes its volatility signature daily, hourly, by the minute during news events. Your static 10% becomes 5% in real terms when volatility halves, 20% when it doubles. You’re not managing risk—you’re ignoring it while pretending otherwise. The first crack in the façade comes when you realize your “equal” positions are bleeding at wildly different rates.
Volatility-Based Sizing: The Pulse Reader
Now we enter the realm of actual thinking. Volatility-based sizing acknowledges what static sizing denies: risk isn’t fixed. When the VIX spikes, when ranges expand, when correlation goes to one, your dollars buy more risk per unit. The intelligent response isn’t to buy the same amount—it’s to buy less. Position size equals risk budget divided by volatility. Simple math, profound implications.
Von Neumann would appreciate this approach. The father of game theory understood that optimal strategy depends on the game state, not fixed rules. In poker, you bet differently against a maniac than against a rock. In markets, you size differently in calm seas than in hurricanes. It’s not about prediction—it’s about calibration. You’re not trying to forecast volatility; you’re responding to it in real-time, letting the market tell you how much exposure it can handle.
This is expectation management in its purest form. Your edge might be constant, but the market’s willingness to deliver on that edge varies wildly. In low volatility, small moves matter more. In high volatility, you need bigger moves just to overcome the noise. By scaling position size inversely to volatility, you maintain consistent risk exposure while the market shapeshifts around you. You’re not eliminating uncertainty—that’s impossible. You’re dancing with it, matching its rhythm, staying in the game when others are getting carried out.
Kelly Criterion: The Gambler’s Edge or the Executioner’s Rope?
The Kelly formula promises mathematical salvation: f* = p – q/b, where f* is the optimal fraction to bet, p is probability of winning, q is probability of losing, and b is the ratio of win to loss. It’s gorgeous in its simplicity, deadly in its application. Kelly sizing maximizes long-term growth rate. It’s provably optimal. It’s also psychologically unsurvivable for most humans who try it.
Full Kelly sizing produces drawdowns that break minds before they break accounts. Even half-Kelly—the supposed conservative approach—generates 25% drawdowns with disturbing regularity. The math is cold, pristine, correct. The trader is warm, messy, human. This gap between mathematical optimality and emotional reality is where careers die. You can have the perfect formula and still blow up because you couldn’t stomach the ride.
This is Jung’s shadow made manifest in numbers. The formula reflects back exactly what you fear: large drawdowns, extended underwater periods, the possibility that optimal and comfortable are mortal enemies. Most traders who attempt Kelly sizing end up overriding it during drawdowns, which is worse than never using it at all. You’ve abandoned discipline precisely when you need it most. The lesson isn’t that Kelly is wrong—it’s that you must size the Kelly to your psyche, not your mathematics. Quarter-Kelly might be suboptimal for your capital but optimal for your survival.
Discretionary Scaling: Intuition With Anchors
Not every successful trader runs formulas. Some scale with feel, reading the market’s mood like a jazz musician reads a room. This isn’t randomness—it’s pattern recognition too complex for simple rules. The discretionary sizer has internalized thousands of market states and learned, often unconsciously, when to press and when to preserve. But this only works with anchors, rules that bind intuition to reality.
The anchors are non-negotiable: risk 1% or less per trade, never add to losers, size down in choppy markets, size up only in clean trends with clear stops. These aren’t suggestions—they’re guardrails that keep intuition from becoming impulse. The discretionary trader who survives long-term is actually running sophisticated algorithms in their head, they just can’t articulate them. The ones who blow up confused feeling with gambling.
This style embodies Heraclitus’s flux while respecting Jung’s shadow. You’re acknowledging that markets flow in patterns too subtle for rigid rules while recognizing that your psyche contains saboteurs. When fear whispers “get smaller,” you listen. When greed screams “double down,” you check the anchors. The market reveals your shadow with every position size decision. Size too large and you’re fighting demons. Size too small and you’re hiding from opportunity. The sweet spot moves, just like the river, and finding it requires both intuition and discipline.
The Role of Max Drawdown & Capital Allocation Limits
Every position sizing strategy eventually meets reality in the form of a drawdown. The question isn’t whether you’ll face one—it’s whether you’ll survive it. This is where limits save lives. Not stop losses on individual trades, but meta-limits on total exposure, sector concentration, correlated bets. You work backwards from ruin, not forward from dreams. The question isn’t “How much can I make?” but “How much can I lose and still function?”
Von Neumann’s minimax theorem applies here: minimize your maximum loss before maximizing gains. This isn’t pessimism—it’s game theory applied to survival. In any game with uncertain outcomes, the player who can withstand the worst case longest has the highest probability of eventual victory. Your max drawdown tolerance isn’t just a number—it’s your psychological breaking point made tangible. Size beyond it and you’ll capitulate at the worst possible moment, turning paper losses into permanent destruction.
Capital allocation limits enforce what discipline forgets under pressure. Never more than 20% in one sector. Never more than 5% in one position. Never more than 50% invested during unclear markets. These aren’t flexible guidelines—they’re survival architecture. The market will test every limit you set, probe for weakness, find the one rule you’re willing to break. That broken rule becomes your epitaph. Better to accept limited upside than unlimited downside. The graves are full of traders who forgot this truth.
Adaptive Sizing: The Final Form
The highest evolution of position sizing synthesizes all approaches into dynamic response. You’re volatility aware but not volatility enslaved. You respect Kelly but aren’t Kelly rigid. You trust intuition but verify with anchors. You maintain limits but adjust within them. This isn’t a system—it’s a practice, requiring constant calibration between market conditions, personal psychology, and mathematical edge.
Adaptive sizing reads multiple timeframes simultaneously. When short-term volatility spikes but long-term trends remain intact, you might reduce size by 30%, not 50%. When your personal edge aligns with market conditions—your setup, your environment, your moment—you scale up within predetermined bounds. When nothing aligns, you go to the sidelines. This isn’t market timing—it’s exposure tuning, like adjusting the aperture on a camera to match available light.
The market speaks in multiple languages simultaneously: price, volume, volatility, correlation, sentiment. Adaptive sizing translates all these inputs into a single output: how much capital to deploy right now. It’s Von Neumann’s game theory meets Heraclitus’s flux meets Jung’s individuation. You’re not trying to beat the market—you’re trying to stay synchronized with it while remaining true to your own psychological limits. Mastery isn’t about getting position sizing perfect. It’s about getting it sustainably close while maintaining the flexibility to adjust when the river changes course.
The Mirror of Magnitude
Position sizing strategies reveal more about the trader than any other decision. Every allocation is a Rorschach test painted in dollars and risk. The oversizer fears missing out more than losing money. The undersizer fears losing money more than missing out. Neither is wrong—both are incomplete. The market doesn’t care about your fears or your dreams. It responds only to what you do, and what you do with size telegraphs everything about who you are.
Jung understood that what we refuse to acknowledge controls us from the shadows. In trading, position sizing is where the shadow lives. That voice telling you to double down after a loss? That’s not analysis—that’s your shadow demanding restoration. The paralysis that keeps you trading minimal size after a drawdown? Same shadow, different mask. The traders who survive learn to recognize these voices without obeying them, to see their psychological patterns without becoming enslaved to them.
Your position size tells the story your conscious mind won’t admit. Size too large and you’re trying to prove something—to the market, to others, to yourself. Size too small and you’re hiding from your own potential, using “risk management” as camouflage for fear. The optimal size exists in the space between these extremes, but it’s not a fixed point. It moves with market conditions, account size, psychological state, and skill development. Finding it requires brutal honesty about both your edge and your limitations.
The market will teach you about yourself through position sizing whether you want the lesson or not. Better to learn voluntarily through careful calibration than involuntarily through blown accounts. Every trade is a mirror, every position size a reflection. The question isn’t whether you’ll see yourself—it’s whether you’ll acknowledge what you see and adjust accordingly. The traders who last aren’t the ones who size perfectly. They’re the ones who size honestly, who match their exposure to their reality rather than their fantasy. Listen to what your sizing tells you about yourself. The market already has.
