How to size a position

Choosing a market is the fun part. Choosing how much to put on it is the part that decides whether you are still trading in six months.

Start with the rule that has no exceptions: stake only what you can lose entirely. A share can go to zero, and unlike a stock it does so on a scheduled date. There is no recovery, no waiting it out, no partial value. That is not a warning about a rare tail case — it is the ordinary, expected outcome for roughly half of everything you ever buy.

What the price tells you about being wrong

A price is a probability, and a probability is a promise about how often you should expect to lose.

Buy at 50¢ and you should expect to be wrong about half the time. Buy at 5¢ and you should expect to be wrong nineteen times out of twenty — that is what 5¢ means. Both can be good trades. But a portfolio of 5¢ positions will show you a long, unbroken run of losses even when every single purchase was correctly priced, and most people abandon the strategy before the arithmetic gets a chance to work.

So size to the losing streak, not to the payoff. If a string of ten losses would make you stop trading or change your rules mid-flight, your position size is already too big, regardless of how good the position is.

Why favourites feel safe and longshots feel cheap

There is a well-documented pattern in betting and prediction markets called the favourite–longshot bias: outcomes at very low prices tend to be overpriced relative to how often they occur, and heavy favourites slightly underpriced.

The reason is psychological rather than mathematical. A 3¢ share costs almost nothing and pays thirty-three times — it reads as a lottery ticket, and lottery tickets attract more money than their odds deserve. Meanwhile an 88¢ share feels like an expensive way to make twelve cents, so it attracts less.

Both feelings mislead. The 88¢ share loses one time in eight, which will hurt far more than you have imagined. The 3¢ share is cheap in dollars and expensive in probability.

A sizing habit that works

Pick a total you are willing to lose over a season — a month, a quarter, whatever period you think in. Divide it so that no single position is more than a small fraction, and hold that fraction constant instead of raising it when you feel certain. Certainty is not information; it is a mood, and it peaks right before the expensive trades.

Two adjustments are worth making. Size down when the spread is wide, because you are paying to enter and will pay again to leave. And size down when the resolution criteria leave room for interpretation, because that is risk you cannot forecast away.

Then let the results accumulate over dozens of positions before you judge anything. Fewer than that and you are reading noise: a good approach can easily look terrible across five trades, and a bad one can look brilliant. The sample size is the strategy.