How much money a strategy can run before its own trading destroys its edge. Small-account strategies routinely have capacities far below what people assume.
Estimate it by asking what fraction of average volume the strategy needs at its typical position size, then applying a market-impact model to see where impact consumes the gross edge. The answer is often startlingly small for anything short-horizon in small caps.
Worked example: a strategy holds 20 names, each for 3 days, and is willing to be 5% of each name's daily volume. If the median name trades $2m a day, that is $100,000 per position and $2m of total capital. Beyond that, either participation rises or you drop to less liquid names, and both cost edge.
Capacity is also why published anomalies persist in academic data yet cannot be traded at scale, and why an edge that works for a retail account may be genuinely unavailable to a fund. Small size is one of the few structural advantages a small trader has.
Original diagrams for the ideas on this page. Illustrative, not real market data.
Expectancy: the average trade. Forty trades sorted by outcome: 24 small losses and 16 larger wins. Weighting each side by how often it happens gives the average result per trade, marked here by the dashed line at +$120.
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