Skip to main content

Position Sizing

Position sizing in TRADEOS.tech is not fixed or arbitrary — it is computed dynamically for every trade based on signal quality, current portfolio state, and market conditions.

Kelly criterion​

The primary sizing model is the Kelly criterion, which maximizes long-term portfolio growth by sizing positions proportionally to edge:

Kelly fraction = (win_rate × avg_win - loss_rate × avg_loss) / avg_win

Where:

  • win_rate is the historical win rate of the signal type generating the trade
  • avg_win and avg_loss are the average gain and loss per trade for that signal type
  • These statistics are tracked by the TCA monitor and IC tracker in real time

The raw Kelly fraction is then modified by:

Kelly fraction cap — each profile imposes a maximum Kelly fraction that is more conservative than the theoretically optimal full-Kelly value. Full-Kelly sizing is practically dangerous due to estimation error in win rates and payoffs; the cap provides a meaningful safety margin. The cap varies across profiles — Conservative applies the tightest cap, Aggressive the most permissive.

Compound Kelly — for portfolios with multiple open positions, the marginal Kelly for a new position accounts for existing portfolio exposure. A position in an already-crowded sector receives a reduced Kelly fraction.

Almgren-Chriss market impact adjustment​

Before finalizing position size, the Almgren-Chriss model estimates the market impact of executing the proposed size:

  • Temporary impact — the transient price movement caused by the order (recovers after execution)
  • Permanent impact — the lasting price move caused by information content of the order

If the estimated impact-adjusted return falls below zero (the trade costs more in impact than it is expected to earn), the position size is reduced until the impact-adjusted return is positive, or the trade is rejected if no viable size exists.

This is particularly important for less liquid instruments in the symbol universe.

Portfolio-level constraints​

After Kelly sizing and impact adjustment, portfolio-level constraints are applied:

Maximum position size — no single position can exceed the profile's max_position_pct of total portfolio value, regardless of Kelly recommendation.

Portfolio concentration — the sum of all positions in correlated instruments (e.g., BTC and ETH) cannot exceed the profile's sector concentration limit.

Available capital check — the system verifies that sufficient free capital exists to fund the position without exceeding maximum leverage (if applicable).

Size rounding and minimum size​

The final position size is rounded to the instrument's minimum lot size. If the rounded size falls below the exchange's minimum order size, the trade is rejected rather than executing at the wrong size.

Sizing in degraded conditions​

When circuit breakers are partially active (e.g., VPIN alert elevated but drawdown breaker not yet triggered), the sizing model applies automatic haircuts to new position sizes. Both the Kelly fraction and the maximum position cap are reduced proportionally to the severity of the stress signal. Existing positions are not re-sized — only new entries are affected.

This makes the system naturally more conservative during periods of market stress without requiring a full halt.