Position Sizing

Hey there, fellow traders! Today, we’re diving into a super important topic that can seriously level up your trading game – Position Sizing. 


So, what’s the deal with Position Sizing, you ask? Well, imagine it as the magic formula that helps you figure out how much to invest in each trade you make. It’s like picking the right outfit for your trading adventures – not tight, loose, just perfect! Let’s break it down step by step.

Alright, let’s get cozy with the concept first. 

Position sizing is simply the amount of moolah you put into a trade. It’s like saying how much skin you’re in the game with. And guess what? Before making that decision, you must consider two things: how deep your pockets are (account size) and how much risk you’re willing to handle. Big account and some risk appetite? Go for a larger position size. 


Now let’s roll up our sleeves and get into the nitty-gritty.

Account Risk Assessment

First things first, you have to look at the risk factor. Think of it like a safety net. You don’t want to risk your entire trading account on one trade, right? Most traders play it cool by risking about 2% of their capital on a single trade. So, if you’ve got, let’s say, a $25,000 account, your “I’m-not-gonna-cross-this-line” risk would be $500.

Trade Risk Evaluation

Now, imagine you’re trading stocks. The distance between your “let’s jump in” price and your “whoa, I’m out” price is what we call trade risk. Say you’re eyeing those Apple shares at $160, and you’ll bail if they drop to $140 – that’s a trade risk of $20 per share.

Optimal Position Sizing

Here’s where the math comes in, but don’t worry, it’s easy peasy. Take your “I-don’t-wanna-lose-more-than-this” risk ($500) and divide it by your “trade risk” per share ($20). Crunch those numbers, and voilà! You’ve got yourself a position size of 25 shares. 


Let’s talk about why this Position Sizing thing is the real deal:

Minimize Emotion in Trading

We all know the market’s got a mind of its own. It can go wild or get all snoozy without a heads-up. Position sizing is like having your cool friend remind you to stay rational. It keeps you from chasing wild trends and helps you enter and exit trades with a level head.

Learn from Trades

Not every trade will be a jackpot. That’s okay! With a solid position sizing plan, you’re like a detective analyzing each trade scene. If something didn’t work out, you’ve got a plan to figure out why. Did you goof up on sizing or let your emotions run the show? Having rules makes you the Sherlock Holmes of trading.

Growing your account

Even if today’s trade isn’t a winner, it’s all about the bigger picture. Keeping your position sizes in check ensures you’re playing the long game. It’s like planting seeds – some will grow into mighty oaks, while others might stay as saplings. But over time, your trading capital will flourish.


So, there you have it, traders! Position Sizing is your secret sauce for trading success. It’s like your GPS navigating the trading terrain. Stay smart, stay strategic, and let’s rock those trades! 

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