Recently, I’ve seen many people discussing the issue of investment position sizing, and that’s when I realized many people don’t even know how to decide how much money to invest scientifically. We often say “don’t go All in,” but what amount should you invest to get the optimal result? The answer actually lies in the Kelly formula.

First, let’s talk about a phenomenon: most retail investors only get stuck on whether the market will go up or down, completely ignoring something more important. In fact, a complete investment decision should consider four dimensions—the probability of an increase, how much upside there is, the probability of a decrease, and how much downside there is. Only by combining these four factors can you calculate the position size you truly should allocate. That is the core logic of the Kelly formula.

The Kelly formula tells us three most important principles: first, even a more promising opportunity can’t be “all-in,” because a single failure could mean losing everything at once; second, if the opportunity is indeed good, you should increase your stake appropriately, not play it conservatively with small bets; third, you should dynamically adjust based on your current financial situation—bet more when you have money, and bet less when you don’t.

In stock or Bitcoin investment scenarios, the Kelly formula is expressed as: f = p/l - q/g. Here, f is the optimal fraction of your capital to invest; p is the probability of a price increase; q is the probability of a decrease (equal to 1-p); g represents the magnitude of the increase; and l represents the magnitude of the decrease. In other words, this formula is like a smart capital allocator—it precisely calculates how much principal to invest each time, based on your judgment of the market and your risk tolerance.

I think the most ingenious part of the Kelly formula is that it balances greed and caution. Good opportunities should be met with heavier bets, but you must leave enough principal to handle bad luck. This way, you can maximize long-term returns without being knocked out entirely by a single mistake.

However, there are a few pitfalls you need to avoid when using the Kelly formula. First, it highly relies on the accuracy of your judgments about probability and payoff ratio—if you overestimate your winning rate, the recommendation the formula gives will end up misleading you. Second, if the position size calculated by the formula exceeds 100%, that means this is basically a trap—there is no opportunity in real life that guarantees profit without loss. Also, many people, in order to further reduce risk, use a “half-Kelly” strategy, meaning they only invest half of the recommended proportion, and that’s also a good choice.

So the next time someone tells you that you should go all-in, just take out the Kelly formula and calculate it once to see what the optimal position size actually is. Good opportunities should be met with heavy bets, but you also need to keep enough capital to ride out bad luck—this is the investment wisdom the Kelly formula teaches us.