edge
Edge, then size the bet
The rule
Only bet when the odds truly favour you. Even then, keep each bet small enough that a run of bad luck cannot ruin you.
Where it flips
Kelly-style sizing on an edge you only imagine is worse than useless. The maths assumes the edge is real. Over-betting a pretend advantage speeds up ruin instead of building gains.
Thorp beat blackjack and then the market. He held two separate rules. First, do you really have an edge, a real, measurable reason the odds favour you? Without one, trading is just paying costs to gamble. Second, if you do have an edge, how much do you stake? The Kelly idea says bet in step with your advantage and never so much that a losing streak wipes you out. This fixes two common mistakes at once: trading with no edge, and, when you do have one, betting the whole account on it.
A worked example
A trader with a small real edge risks 1% of his money per trade, so twenty losses in a row still leave him standing. A beginner with no edge betting 50% at a time is ruined by the first bad run. [illustrative]
How to spot it
- ·you can state a real reason the odds favour you
- ·each bet is small enough to survive a losing streak
- ·you take no trade when the honest answer is 'no edge'
Edward Thorp · A Man for All Markets