Position Sizing
Optimize your trade sizes to manage risk and maximize potential returns.
Overview
Position sizing is a critical component of risk management that determines how much capital to allocate to each trade. Proper sizing helps protect your portfolio while maximizing potential returns.
Never risk more than 1-2% of your total portfolio on a single trade. This is essential for long-term survival in the markets.
Position Sizing Methods
Fixed Risk
Risk a fixed percentage of your portfolio on each trade.
Example: 1% risk on $10,000 = $100 maximum risk per trade
- • Consistent risk exposure
- • Easy to calculate
- • Preserves capital during drawdowns
Volatility-Based
Adjust position size based on market volatility.
Higher volatility = Smaller position sizes
- • Adapts to market conditions
- • Uses ATR or standard deviation
- • More sophisticated approach
Calculation Methods
Position Size Formulas
Fixed Risk Method
Position Size = (Account Size × Risk Percentage) ÷ (Entry Price - Stop Loss)
Volatility-Based Method
Position Size = (Account Size × Risk Amount) ÷ (ATR × ATR Multiple)
Risk Management
Position Limits
- • Maximum position size per trade
- • Total exposure limits
- • Correlation adjustments
Portfolio Considerations
- • Account for existing positions
- • Market correlation impact
- • Liquidity requirements
Best Practices
- • Start with conservative position sizes
- • Adjust sizing based on win rate
- • Account for market liquidity
- • Regular review and adjustment of sizing rules
- • Document all position sizing decisions