Risk the same small fraction of capital on every trade, so no single loss can do lasting damage.
What it asks you to do
Fix the percentage of capital you are willing to lose per trade before entering.
Derive position size from that amount and the distance to your stop — not from conviction.
Recalculate as capital changes, so size falls automatically during a losing run.
Where it struggles
Only works if the stop is honoured. It also assumes the stop can be filled at the intended price, which gaps and illiquid names routinely break.
Source: Trade Your Way to Financial Freedom
Kelly Criterion
John L. Kelly Jr. · 1956
Advanced
Calculates the bet size that maximises long-run growth given a known edge and payoff.
What it asks you to do
Takes the probability of winning and the win/loss payoff ratio as inputs.
Returns the fraction of capital that maximises compound growth.
Shows mathematically that both over-betting and under-betting reduce long-run outcomes.
Where it struggles
Assumes you know your edge precisely. In markets you never do, and overestimating it produces dangerously large positions — which is why practitioners use a fraction of the Kelly figure.
Source: A New Interpretation of Information Rate (Bell System Technical Journal)