Capacity
How much capital can you deploy without moving the market?
See capacity for all markets
Definition
Capacity estimates the maximum position size you can deploy without significant market impact. Exceeding capacity leads to:
- Worse entry/exit prices
- Faster rate decay (your trade normalizes the rate)
- Potential losses that exceed projected gains
Formula
Where:
- = Open interest
- = Impact threshold (typically 1-3%)
- = Average trading volume
- = Holding period
Types of Capacity
Soft Capacity
The position size at which returns start to degrade. You can exceed soft capacity, but returns diminish.
Hard Capacity
The absolute maximum before market impact dominates returns. Exceeding hard capacity likely results in losses.
Interpretation
| Soft Capacity | Market Size |
|---|---|
| $10M+ | Large, liquid market |
| 10M | Medium market |
| 1M | Small market |
| <$100K | Very small, illiquid |
Position Sizing Guidelines
| Risk Level | Recommended Size |
|---|---|
| Conservative | 25% of soft capacity |
| Moderate | 50% of soft capacity |
| Aggressive | 75% of soft capacity |
Never exceed soft capacity unless you have specific information suggesting higher capacity.
Capacity Degradation
Returns degrade as position approaches capacity:
Where:
- = Your position size
- = Degradation exponent (typically 0.3-0.5)
Related Metrics
- Crowding Risk — Competition for capacity
- Survivable APR — Adjusted for position size
- Soft Capacity USD — Screener display