Position Sizing
The process of determining how many shares to buy per trade based on edge, bankroll, and risk tolerance — typically derived from Kelly criterion.
Definition
Position sizing is the decision of how much capital to allocate to a single trade. Proper sizing balances maximizing growth with limiting ruin risk. The Kelly Criterion provides a theoretically optimal fraction of bankroll per trade given a known edge. In practice, fractional Kelly (e.g., 25-50% of Kelly) is used to reduce variance at the cost of slightly slower expected growth.
In practice
A predtools bot calculates position size dynamically. Given a $500 bankroll, a Kelly fraction of 0.10 (after fees), and a market price of $0.50 per share, the Kelly-optimal spend is $50, buying 100 shares. If the bot uses quarter-Kelly to reduce drawdown, it buys 25 shares for $12.50. Position size is also capped by the order book depth — if only 50 shares are available near the target price, the bot takes 50 regardless of the Kelly-optimal size. Minimum position constraints (e.g., 5 shares minimum on Polymarket) also bound the lower end of sizing decisions.