Recently, many people have been discussing investment positions, but behind this there is a classic theory called the Kelly Criterion, which many top traders use, but most retail investors don't know about.

Let's first look at where the difference lies. Ordinary retail investors only think about "rise or fall," but truly knowledgeable traders ask four questions: What is the probability of rising? How much can it rise? What is the probability of falling? How much can it fall? Combining these four factors allows you to calculate how much money you should actually invest. This is the core logic of the Kelly Formula.

Honestly, the philosophy of the Kelly Formula is simple but profound. Don't be too greedy; even with a high win rate, you shouldn't go all-in at once, because one failure could wipe you out. But don't be too conservative either; if the opportunity is really good, you should appropriately increase your stake to earn more. The key is to adjust dynamically based on your current capital situation—bet more when you have money, bet less when you don't—so you can maintain an advantage in the long run.

The mathematical expression of the Kelly Formula is actually not complicated. Suppose f is the proportion of your capital to invest, p is the probability of an increase, q is the probability of a decrease, g is the magnitude of the increase, and l is the magnitude of the decrease, then: f = p/l - q/g. The beauty of this formula is that it considers all variables, not just the win rate.

Why is buying stocks or Bitcoin different from gambling? Because even if you lose, it's only part of your capital, not all of it (unless it drops to zero). In such cases, the Kelly Formula becomes especially useful. It acts like a smart capital allocator, helping you decide how much principal to invest each time, maximizing long-term returns while avoiding the risk of bankruptcy.

But there are a few pitfalls to watch out for. First, the accuracy of the Kelly Formula entirely depends on your predictions of win probability and payoff ratio; if you overestimate, the formula will mislead you. Second, if the formula suggests you invest more than 100%, that’s a trap—there's no such thing as a guaranteed profit in reality. Many experienced traders actually use a "half-Kelly," investing only half of the suggested proportion, which further reduces risk.

So next time someone tells you to go all-in, remember to use the Kelly Formula to calculate the optimal position size and see what it should really be. The core lesson this formula teaches us is: bet heavily on good opportunities, but always keep enough capital to withstand bad luck.