Position Sizing
Quick Answer
Determining how many shares or contracts to trade based on risk tolerance and account size.
The Importance of Position Sizing
Position sizing might be the most important factor in trading success. It answers: 'How much should I risk on this trade?'
Key Benefits: 1. Protects against ruin - No single trade can blow up your account 2. Enables consistency - Risk the same percentage on every trade 3. Manages emotions - Appropriate size means you can think clearly 4. Maximizes growth - Compound gains without excessive drawdowns
The 1-2% Rule
A common approach is to risk only 1-2% of your trading account on any single trade.
Example Calculation: - Account size: $10,000 - Risk per trade: 1% = $100 - Entry price: $50 - Stop loss: $48 (risk of $2 per share) - Position size: $100 ÷ $2 = 50 shares
This way, even 10 consecutive losses only draw down your account by 10%.
Factors to Consider
Trade Quality Some traders size up for higher-conviction setups while staying smaller on speculative trades.
Volatility More volatile assets may require smaller positions to maintain the same dollar risk.
Correlation If you have multiple positions in correlated assets, consider reducing individual sizes.
Account Growth Recalculate position sizes as your account grows or shrinks to maintain consistent percentage risk.