Why Position Sizing Matters
Even a profitable strategy can fail if position sizes are too large. Managing how much you risk on each trade helps cushion inevitable losses and smooth your equity curve. Without proper sizing, a single bad trade can wipe out weeks of gains.
The One‑Percent Rule
A simple starting point is the one‑percent rule: risk no more than 1% of your trading capital on a single position. For example, with a $5,000 account, your maximum risk per trade would be $50. Calculate the distance between your entry price and stop‑loss in dollars, then adjust your position size so that, if the stop‑loss hits, your loss does not exceed 1% of your account.
Calculating Position Size
To determine quantity, divide your risk per trade by the difference between your entry and stop‑loss prices. Suppose you want to risk $50 and you’re trading a stock priced at $25 with a $24 stop. The per‑share risk is $1 ($25 – $24), so you could purchase 50 shares ($50 ÷ $1) to adhere to the one‑percent rule.
Adjusting for Volatility
Volatile instruments require wider stops, leading to smaller position sizes. Conversely, low‑volatility assets may allow larger positions. Some traders use the Average True Range (ATR) indicator to set stops relative to recent volatility, ensuring consistent risk across different markets.
Scaling In & Out
Advanced traders may scale into positions gradually, buying partial amounts as a trend confirms, and scale out as it approaches targets. This technique can improve average entry prices and reduce the emotional impact of committing all capital at once.
Conclusion: Position sizing is an essential component of risk management. Use guidelines like the one‑percent rule, calculate your size based on stop‑loss distance and adjust for volatility. Practice sizing in our simulator to develop consistency before applying it to your real trades.