Recently, I’ve been pondering a question: Why do many people easily get wrecked when trading cryptocurrencies or stocks, but top gamblers and professional traders can survive long-term? The key lies in position management.

Most retail investors operate with a simple logic—go all-in when they see a bullish trend, and clear their positions when bearish. But the problem with this approach is that a single misjudgment can wipe out their entire capital. I recently revisited an old but super practical concept: the Kelly formula. This tool essentially tells us that the essence of investing is probability theory.

The core idea of the Kelly formula isn’t complicated: when there’s a good opportunity, you should bet big, but only if you have enough capital to withstand bad luck. The biggest difference between buying stocks or BTC and gambling is that even if you lose, you only lose a part of your capital, not your entire account (unless the price drops to zero). In this case, the Kelly formula becomes: f = p/l - q/g

Where f is the proportion of your capital to invest, p is the probability of price going up, q is the probability of it going down, g is the potential gain if it goes up, and l is the potential loss if it goes down. In simple terms, it considers the probabilities and the magnitude of gains and losses to determine the optimal position size.

I’ve realized that many people tend to overestimate their judgment ability. When someone tells you to go all-in, the best response is to run the Kelly calculation. If the suggested position exceeds 100%, it’s a trap—there’s no such thing as a guaranteed profit without risk.

The smartest part of the Kelly formula is that it dynamically adjusts based on your capital. When you have more money, you can bet more; when you have less, you should be more conservative. It’s like a financial strategy brain that helps maximize long-term returns while avoiding bankruptcy.

But be aware of a few pitfalls: first, the accuracy of the Kelly formula depends entirely on your predictions of win rate and payoff ratio. Overestimating them can lead to losses. Second, many people use a half-Kelly strategy, investing only half of the suggested amount, which further reduces risk.

Ultimately, what the Kelly formula teaches us is this: when there’s a good opportunity, bet big, but always leave enough capital to withstand bad luck. That’s the secret to surviving long-term.