Position sizing is how you turn a trade idea into a quantity. You must pick beforehand what a loss is allowed to cost, measure the distance from your entry to your stop, and the size comes from those two numbers. It's the only part you control, and the part most people do randomly.
What is position sizing?
It's the answer to "how many", after you've already picked what and where. Your entry and your stop set the distance. Your risk budget sets the money. Size is whatever makes those two agree. Nothing about conviction belongs in it, because a setup that feels certain loses just as much as one that doesn't when the stop gets hit.
How much does the percentage matter?
More than anything else on this page. The same strategy at four different risk levels is four different businesses:
| Risk per trade | On a $25,000 account | After 10 losses in a row |
|---|---|---|
| 0.5% | $125 | down about 5% |
| 1% | $250 | down about 10% |
| 2% | $500 | down about 18% |
| 5% | $1,250 | down about 40% |
Ten losses in a row sounds extreme until you count how many trades you take in a year. Pick the number you can feel ok with. That's the risk per trade decision, and it drives your risk of ruin. Don't touch it after deciding the number. Changing it constantly affects how you recover from the losing streaks.
Percentage of balance or fixed size?
There are multiple opinions here. In short, if you want it to take you the same amount of trades to recover as it took you to go that deep in drawdown, always do the same amount in money. The deeper the drawdown gets, that amount will increase in % of the account. $100 risk on a $20,000 account is less % than $100 risk on an $18,750 account. If you keep the same %, the money at risk will be less in each loss, which can feel more conservative, but it will potentially take you more wins to recover.
What breaks it
Three things. The wrong contract size or tick value, which makes every trade twice what you planned, so check it with your broker. Gaps and slippage, which fill your stop past where you wanted and make the real loss bigger. And sizing up after a good week... that one feels ok, which is exactly why it costs so much. Sizing can't rescue a losing system either. If your expectancy is negative, smaller size only slows the bleed.
Frequently asked questions
Related terms
- Sortino Ratio — How much return a strategy earns for the losses it actually makes you feel.
- Maximum Drawdown — The deepest hole a strategy has dug you into, peak to bottom.
- Sharpe Ratio — How much return a strategy earns for every unit of risk it takes.
- Volatility — How much and how fast a strategy's returns swing around.