Most traders obsess over finding the perfect entry point or discovering a secret indicator that will unlock consistent profits. They spend countless hours analyzing charts, backtesting strategies, and searching for that elusive edge. Yet many still struggle to achieve meaningful returns. The reason might surprise you: they’re focusing on the wrong part of the equation.
According to legendary trader Stanley Druckenmiller, who learned directly from George Soros, position sizing accounts for 70-80% of trading success. Understanding why this matters could transform your approach to markets entirely.
1. Understanding the Two Components of Trading Success
When you break down the mechanics of generating excess returns in trading or investing, there are fundamentally two components at play. The first is having an edge, which means possessing a belief or mathematical advantage that isn’t reflected in current odds of market prices. This edge is what most traders focus on exclusively. It’s the reason they believe their analysis will lead to profitable outcomes that others haven’t anticipated.
The second component, and arguably the more important one, is position sizing. This addresses the critical question: once you’ve identified an edge, how much capital should you allocate to that particular opportunity? The relationship between these two elements—your edge and your position size—ultimately determines your total ability to generate excess returns. You could have the most brilliant market insight in the world, but if you only risk a tiny fraction of your capital on it, the impact on your overall portfolio will be negligible. Conversely, betting heavily on a weak edge can lead to catastrophic losses.
The intuition behind optimal position sizing is straightforward when taken to extremes. If you had perfect information and knew with absolute certainty that your trade would be profitable, you would logically bet everything you could. Why wouldn’t you? Ideal information means guaranteed profits. But in reality, trading exists in a world of probabilities, not certainties. There are degrees of certainty, varying levels of conviction, and different qualities of edges. This is where the art and science of position sizing becomes crucial.
2. The Mathematics of Position Sizing
The mathematical relationship between edge and betting size isn’t linear, and this is where many traders go wrong. They think having a slight edge justifies a proportionally small position, or that a strong edge means going all-in. The reality is more nuanced. Your position size needs to account not just for the strength of your edge, but also for the potential downside, the volatility of the asset, your overall portfolio size, and your ability to withstand being wrong.
This is why position sizing has such an outsized impact on long-term returns. Two traders could have identical win rates and similar edges, but the one who sizes positions appropriately will vastly outperform the one who doesn’t.
Undersizing means leaving money on the table when you’re right. Oversizing means taking unnecessary risks that can compound into severe drawdowns when you’re wrong. The optimal approach involves scaling your position size in proportion to your conviction level, while maintaining risk controls that prevent any single trade from causing irreparable damage to your capital.
The challenge lies in honestly assessing your edge and your level of certainty. Overconfidence leads to oversized positions on mediocre setups. Excessive caution means missing opportunities where the risk-reward genuinely justifies aggressive positioning. Finding this balance requires both analytical skill and emotional discipline, which is precisely why so few traders master it.
3. The Soros Lesson: Quality Over Quantity
Perhaps no example illustrates the power of position sizing better than George Soros, one of the most successful investors of our time. Druckenmiller, who managed money alongside Soros for years, shared a striking insight: Soros made money on fewer than 30% of his trades. Let that sink in. One of history’s greatest traders was wrong more often than he was right. His batting average wasn’t what made him legendary.
What separated Soros from countless other traders wasn’t his ability to consistently pick winners. It was what he did when he identified a high-conviction opportunity. When Soros had a strong edge—when his analysis suggested a significant mispricing in the market—he didn’t just take a standard position. He bet heavily. And crucially, when those positions moved in his favor, he let them run. He didn’t take quick profits or exit at predetermined targets. He allowed his winners to compound into enormous gains.
This approach means that Soros likely had many investments that lost money, but those losses were contained. They didn’t lose much because he sized them appropriately for his level of conviction or cut them quickly when proven wrong. But when he made money, he made tremendous amounts through the combination of large initial position sizes and the discipline to let those winning positions grow substantially. This is the essence of position sizing mastery: losing small on your mistakes and winning big on your best ideas.
4. The Psychology of Letting Winners Run
There’s a psychological dimension to position sizing that often gets overlooked. It’s one thing to understand intellectually that you should bet more when you have a strong edge. It’s an entirely different matter, actually, to do it when real money is at stake. Most traders suffer from risk aversion that causes them to undersize their best opportunities and exit winners too early.
The fear of being wrong, of losing money, or of watching profits evaporate creates a powerful psychological pressure to play it safe. This manifests as taking small positions even when conviction is high, or cutting winners short to “lock in gains.” But this approach virtually guarantees mediocre results. If you’re only willing to risk small amounts on your best ideas and quick to take profits when you’re right, you can’t overcome the inevitable losses when you’re wrong.
Letting winners run simultaneously with proper initial sizing requires immense discipline. It means watching positions grow to represent larger percentages of your portfolio, which naturally feels uncomfortable.
It means staying in trades when your instinct is to secure profits. It means trusting your analysis enough to maintain exposure even as positions become meaningful. This psychological challenge is precisely why position sizing accounts for such a large percentage of trading success—it’s not just about the math, it’s about the emotional fortitude to execute the math when it matters.
Conclusion
The revelation that position sizing accounts for 70 to 80% of trading success should fundamentally change how you approach the markets. Your edge matters, and developing strong analytical skills remains essential. But if you can’t translate that edge into appropriately sized positions, you’re leaving the majority of potential returns on the table.
The lesson from Soros isn’t that you need to be right all the time. It’s when you identify genuine opportunities where you have conviction that you need to act decisively. Size positions according to the strength of your edge, protect capital on uncertain trades, and perhaps most importantly, have the discipline to let winning positions grow.
This approach won’t guarantee success, but it aligns your trading with the mathematical realities of how outsized returns are actually generated. Master position sizing, and you’ve mastered the most critical part of the trading game.