Strategy
Position Sizing Basics
Position sizing determines how much to trade, derived from the capital at risk and the distance to the stop-loss. It is arithmetic rather than opinion, and it operates independently of whether any particular trade is a good idea.
How it is calculated
How to read it
- The risk amount is decided first, then the stop distance converts that amount into a quantity. Reversing the order produces stops placed to justify a size.
- Position value and risk are different figures. A position can be worth a large share of the account while risking a small one.
- Losses and recoveries are asymmetric: a 50% drawdown requires a 100% gain to undo, which is the entire argument for keeping individual risk small.
What it does not tell you
- Correct sizing does not make a losing method profitable; it controls how quickly a losing method depletes capital.
- Stops can be passed through during gaps or thin liquidity, so realised loss occasionally exceeds the intended amount.
- Sizing that ignores volatility means the real risk taken drifts as conditions change.
Frequently asked questions
How much should I risk per trade?
Convention among professional traders is 0.5% to 2% of capital. The reasoning is arithmetic: at 2% risk a ten-loss streak costs roughly 18% of the account, while at 10% risk the same streak costs about 65%, which requires a 186% gain to recover.
What if the calculated size is less than one lot?
It indicates the trade does not fit the risk limit at that stop distance. Taking one lot regardless means exceeding the limit that was set.
Should position size be based on margin?
No. Margin is what the broker requires to hold a position; it is unrelated to how much is lost if the stop is reached. Sizing from available margin is a common route to unintended risk.
Related
- Average True Range (ATR) — Indicator
- Volatility: What It Measures and What It Does Not — Concept
- Risk-Reward Ratio — Strategy
Educational use only
This page is educational material about how a technical tool is calculated and read. It is not investment advice, not a recommendation to buy or sell anything, and not a signal service. No indicator predicts future prices. CernoQuant is a trading journal and analytics platform, not a SEBI-registered investment adviser. Trading decisions and their outcomes are yours alone.
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