This article is adapted from: "Learning to Think and Get Rich"

Warren Buffett said: The first rule of investing is never lose money, and the second rule is to remember the first.
The vast majority of retail investors lose money in the stock market not because they are beaten by the market or the big players, but because they go all-in without restraint. Many people hold trading systems with good win rates, but because of one all-in bet, they lose all their profits and principal. The Kelly formula, revered as the Bible of position sizing on Wall Street, uses the coldest mathematical logic to reveal the core pitfalls of long-term retail investor losses and provides a practical capital management solution for ordinary people. Those who truly survive in the market are never the ones who make the fastest gains, but those with the most stable position management. Without proper position control, even the highest win rate ultimately results in a zero-sum game.
1. Kelly Formula: Not predicting rises and falls, but teaching you the mathematical rule to "stay alive"
Many retail investors misunderstand the Kelly formula, thinking it is a magic tool for stock picking or catching limit-ups. In fact, it has nothing to do with market trends.
Its core function is to calculate the optimal position size for each trade, using mathematics to avoid the risk of margin calls.
The key formula provided in the diagram is clear and straightforward: f=(b×p−q)÷b, where each letter is a lifeline for capital safety.
f represents the optimal position size, the maximum proportion of funds to be used for each bet. It is not full position, not half, but a scientific value.
p is the win probability, the likelihood that this trade will end profitably, based on long-term statistical true win rate, not feelings.
q is the loss probability, fixed at 1-p, representing the probability of losing. Profit and loss are always opposites.